Take a structured approach to M&A due diligence

LexisNexis's Rudi Kruger expects an increase in M&As over the next few months as companies look for help.

Anything and everything, besides that which was considered essential, took a back seat over the past few months – not only during the two-month long lockdown but since early March – when the first case of Covid-19 was reported in South Africa. Large commercial transactions such as mergers and acquisitions (M&A) were placed on hold or postponed. But as the economy continues opens up on level three of the national lockdown, experts are expecting an increase in M&As over the next few months, given that many companies are going to need help in order to survive the global pandemic. 

Mergers and acquisitions have always offered lucrative opportunities for businesses to expand their areas of operation, gain a larger market share, maximise profits or reduce competition. Now, with so many companies affected by lower share price, loss of revenue, and loss of future demand, there is sure to be greater interest from investors or organisations seeking such opportunities. 

Considered among the most complex and potentially risky business activities, M&As present several opportunities for failure during and after the purchase. Heightening the risk is this global pandemic, which will have lasting impacts on many businesses. However, the show must go on and in the case of M&As, no other step is as critical to the transaction than due diligence. 

Within the context of Covid-19, specific risk areas need extra care and attention during the vetting stages. Strict and effective due diligence should be an integral element of a merger and acquisition, especially in these uncertain times. There really isn’t any room for error or oversight.

Therefore, best practice is to always take a structured approach to due diligence. 

Major risk areas for thorough vetting include – legal compliance, financial health (revenue and forecasted debt), contracts, insurance, suppliers and customers. All documentation of the target organisation must be up-to-date and accessible for proper assessment. This, of course, should be followed by vetting and verification.

Furthermore, the actions of a company’s leadership are extremely impactful right now as any poor decision will drastically affect the business. Leadership vetting should therefore be a key area of focus, especially during an unprecedented time like a global pandemic, where decision making is put to the ultimate test. 

Be sure to perform company or person checks, explore associated entity interests, check against sanctions, check for red flags and politically exposed persons, search for negative news, check the litigation history and assess country risk.

Due diligence on an enhanced level is best complemented with digital tools as these offer quick and detailed results, analyses and reports. Good solutions have access to the relevant laws and databases, that are not only comprehensive but up-to-date. Digital solutions have allowed us to ride the wave of a global shutdown by enabling us to stay connected, productive and effective. Even simple tasks have been digitised to make life easier, and due diligence is no different.