According to a report by Bain & Company, Indian companies executed over 90 M&A deals valued at approximately $32 billion in 2023. This marks an exponential growth in mergers and acquisitions in India compared to previous years. However, a 2023 study by Harvard Business Review reveals that, despite the success of some, a staggering 70% to 90% of M&A deals fail worldwide.
One of the major reasons for Mergers and Acquisition failure is the lack of thorough due diligence. For an M&A to succeed, it’s crucial for them to understand the importance of due diligence, as the lack thereof could lead to hidden liabilities, overpayment, operational issues, regulatory complications, and ultimately, deal failure.
Take a moment to read this blog and understand how due diligence can pave the way for success in your upcoming Mergers and Acquisition in India or beyond!
What Is Due Diligence?
Due diligence refers to the thorough investigation and analysis of a potential investment or transaction, typically conducted before finalizing an agreement. For any transaction to succeed—whether it’s a joint venture, merger, or acquisition, a thorough Due Diligence process is essential.
This process involves reviewing financial records, legal compliance, operational metrics, and other critical information to check whether all relevant facts are taken into consideration.
In the context of mergers and acquisitions (M&A), due diligence is particularly vital due to the complexity and the huge sum of investment involved. It provides a detailed understanding of the target company’s financial health, legal standing, and operational efficiency.
Without due diligence, companies that could potentially achieve a successful transaction may end up succumbing to costly failure. In short, due diligence paves the way for smoother integration and long-term success even post-transaction.
Here’s a quick read on how M&A consulting as a whole can benefit your merge: Mergers and Acquisition Consulting: Your Key to a Successful Merger
Types of Due Diligence:
Gain a quick yet thorough understanding of the different types of due diligence that play a key role in the success and long-term growth of mergers and acquisitions in India.
1. Operational Due Diligence
This type assesses how well a company operates. By checking workflows, supply chains, and production capabilities, it helps identify potential bottlenecks and areas of improvement that could impact the success of the merger.
2. Legal Due Diligence
Legal due diligence involves reviewing all legal documents related to the target company, including contracts, compliance with laws, and litigation history. This process helps detect any legal risks that may pose challenges to the acquisition and also ensures that both parties are well aware of their legal obligations.
3. Financial and Accounting Due Diligence
This type specifically focuses on assessing the financial health of the target company. It involves a thorough review of financial statements, audits, and cash flow analyses, ensuring that the acquirer has an accurate understanding of the company’s financial position before it makes any significant investment decisions.
4. Tax Due Diligence
Tax diligence evaluates the target company’s compliance with tax laws and thoroughly checks if they are concealing any surprise liabilities or lacking potential benefits. This step is essential for optimizing the tax position post-acquisition and mitigating any hidden tax risks that could affect the deal’s financials.
5. Reputational Due Diligence
This type examines the target company’s reputation and any potential “red flags” that could pose harmful risks. By conducting background checks, acquirers can ensure they avoid the partnership with a company dealing with legal or regulatory issues, protecting their own organization’s future liabilities.
6. Market and Commercial Due Diligence
This diligence investigates the target company’s market position, growth prospects, and the overall competitive landscape. This helps acquirers get a clear picture of the company’s commercial viability, so that they can make strategic decisions that align with market demands and therefore, prepare themselves for sustainable growth.
7. Technical Due Diligence
This involves a comprehensive review of the target company’s technological capabilities, including its IT infrastructure and product roadmap. Grasping the technical landscape helps identify any integration challenges and ensures that the merged entity harnesses technology to its fullest potential.
At MARC, our experienced professionals go above and beyond to help businesses, ranging from SMEs to established entities make informed M&A decisions by thoroughly analyzing costs, benefits, structures, assets, and liabilities.
If you’re specifically entering the retail M&A sector, read the following guide: Key to Successful Retail Mergers in India
The Importance of Due Diligence for Mergers and Acquisitions in India
By shedding light on potential risks, due diligence proves to be useful for Mergers and Acquisition in India, enabling companies to make informed business decisions, and experience the benefits of M&A firsthand.
- Identifying Potential Risks and Liabilities: Due diligence provides you with a clear picture of the target’s operations and finances, helping spot potential problems early on and avoid the occurrence of costly litigation.
- Valuing the Target Company: Overlooking this aspect can lead to unfair financial decisions that every company strives to avoid. A thorough review of financial statements allows buyers to make smart decisions and minimize the risk of overpaying or undervaluing the target company.
- Understanding the Target Company’s Business and Operations: Analyzing how the target company runs and its management setup helps buyers figure out their goals and spot any risks that they are likely to face post-acquisition.
- Spotting Potential Synergies: Due diligence finds effective ways to cut down costs and fosters synergies that can maximize returns and minimize expenses post-merger.
- Complying with Legal Requirements: Understanding the target’s legal standing can save buyers from future penalties, legal trouble and irreversible reputational damage.
Case Study: Failure of Mergers and Acquisitions in India
Tata Motors and Tata Daewoo (2004)
- Overview: Tata Motors acquired South Korean company Daewoo Commercial Vehicle Company to strengthen its position in the commercial vehicle market.
- Reason for Failure: The acquisition faced several challenges due to a lack of proper due diligence concerning the operational capabilities and market conditions in South Korea. Unfortunately, Tata Motors underestimated the difficulties of integrating Daewoo’s operations and managing its financial issues.
- Outcome: The acquisition did not yield the expected synergies, and Tata Motors struggled to revive the brand, leaving them with a significant financial burden.
Case Study: Success of Mergers and Acquisitions in India
HDFC Bank and Centurion Bank of Punjab (2008)
- Overview: HDFC Bank merged with Centurion Bank of Punjab to expand its footprint in India’s banking sector.
- Due Diligence Process: The merger involved thorough due diligence, including financial assessments, regulatory compliance checks, and an analysis of customer bases and operational structures. HDFC Bank took the smart initiative of understanding Centurion’s strengths and weaknesses, to succeed in their merging process.
- Outcome: The merger proved to be a great success, significantly boosting HDFC Bank’s customer base and market share. Hence, this merger has been recognized as one of the most successful mergers in the Indian banking sector.
Steps Taken by MARC to Conduct Due Diligence:
MARC follows a systematic and structured approach to conducting due diligence for mergers and acquisitions, both in India and globally. Below is a breakdown of the steps involved:
1. Audit and Review Financial Statements
MARC carefully examines financial records to check for accuracy and transparency. By doing so, we identify potential discrepancies through detailed analysis.
2. Project Future Business Performance
MARC uses financial modelling thoroughly to forecast growth and profitability, factoring in market conditions and historical data.
3. Examine the Consumer Market
MARC’s in-depth market research assesses demand, competition, and trends. This step is crucial as it offers insights into growth opportunities and market dynamics.
4. Identify and Remove Operational Redundancies
MARC audits internal processes to pinpoint inefficiencies if any. This step helps streamline operations for improved cost-effectiveness and performance.
5. Assess Potential or Ongoing Legal Issues
MARC collaborates with legal experts to review contracts and litigation, this ensures compliance and identifies legal issues that could come in the way of the deal.
6. Evaluate Compliance with Antitrust Laws
MARC reviews market share and past mergers to ensure they follow antitrust laws and avoid potential regulatory challenges.
7. Analyze Subcontractor and Third-Party Partnerships
MARC assesses external relationships, such as supplier and subcontractor agreements, to identify any risks or opportunities tied to these partnerships.
8. Identify and Quantify Financial and Operational Risks:
MARC digs deep to identify and quantify any financial and operational risks that could impact the investment. We carefully uncover hidden financial drains, evaluate long-term commitments, and flag any industry-specific risks or growth opportunities to keep you informed. Our tax assessments help reduce future liabilities and keep everything compliant, while we also spot any high-risk liabilities, like environmental or legal issues, that could potentially affect the deal’s success.
Count on MARC for All Your Due Diligence Solutions!
Due diligence isn’t just about identifying risks, it’s more than that. It’s about uncovering opportunities that open doors to long-term success for your business. With our global presence and expertise in strategy, compliance, operations, and financial analytics, we help businesses of all sizes, from SMEs to global leaders, navigate the complexities of M&A with ease.
Partner with MARC to ensure your next mergers and acquisition in India, or anywhere across the globe, are built on a foundation of smarter strategies and the smartest investments.
Looking to get in touch with our team? Visit our website for contact details or email us at [email protected].
