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Due Diligence for Global Deal Making

The Definitive Guide to Cross-Border Mergers and Acquisitions, Joint Ventures, Financings, and Strategic Alliances

Due Diligence for Global Deal Making by Arthur H. Rosenbloom
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Companies of all sizes have been initiating international transactions--mergers and acquisitions, joint ventures, strategic alliances, and private placements--in record numbers. Targeted due diligence is crucial to effectively research, value, and complete these complex deals. With an evolving climate of uncertainty and new, unpredictable threats to business, it is more essential than ever before.

Due Diligence for Global Deal Making is an invaluable guidebook for companies trying to capitalize on the opportunities in both developed and emerging cross-border markets. All too often global transactions fail to meet the parties' expectations, and the leading culprit is inadequate due diligence. Especially when the target partner lacks a financial performance track record and significant assets, expanding businesses must answer difficult questions, such as: Why (if at all) do this deal? What are the rules going in, and what happens if things go wrong? Where are the tax, legal, financial, and operational traps, and what are the opportunities? This book provides what’s needed to avoid devastating mistakes and to master the steps that ensure success:

  • Expert analysis, insights, and strategies from experienced practitioners and leading authorities in cross-border matters
  • In-depth coverage of critical topics decision makers need to understand in order to succeed in cross-border transactions--from corporate planning to operational, financial, legal, tax, accounting, and people/organizational considerations
  • Best practices of corporate investors and professional advisers in conducting critical due diligence

Noted experts discuss critical topics corporate executives--and all those involved with their company's legal, operational, accounting, and tax matters--need to know to successfully complete complex global transactions today.

Wiley; May 2010
366 pages; ISBN 9780470884744
Read online, or download in secure EPUB or secure PDF format
Title: Due Diligence for Global Deal Making
Author: Arthur H. Rosenbloom
 
Excerpt
What Is Due Diligence? Transactional due diligence is the investigation by an investor or its advisers of the accurate and complete character of the target company’s business. The target may be an acquisition candidate, a joint venture or strategic alliance partner, a prospective public offering registrant, or a company the investor is considering for minority interest private placement purposes. Due diligence must be linked to the investor’s corporate strategy; in fact, the goal of much of the legal, financial, and operational due diligence is to determine whether a transaction with a given target is in the service of that strategy. Due diligence also includes investigating the target’s legal status, from its proper legal authorization to do business to its actual or contingent liabilities and all points between. In addition, it includes analyzing the target’s historical, current, and projected financial statements. It involves scrutinizing the target as a whole and its corporate, divisional, or subsidiary affiliates. When the investor and the target are in the same industry, transactional due diligence explores financial, operational, or managerial synergies between the investor and the target. Transactional due diligence is not the exclusive province of the investor. Target companies should perform transactional due diligence on the investor, especially if the investor is offering consideration other than cash. Even in an all-cash transaction, a thoughtful target investigates the extent to which an alliance with the investor will assist it in growing its business, not to mention the critical question of whether, in an M&A or joint venture situation, corporate cultures can mesh. History’s lesson is that transactions resulting in personality clashes or dramatically different styles of doing business (entrepreneurial versus highly structured companies, centralized versus decentralized, or the special culture wars that sometimes arise in cross-border deals) seldom produce attractive post-transaction outcomes.
No two due diligence efforts are alike, and for the practitioner each transaction presents novel issues. Due diligence may reveal that a Native American tribe claims title to the land under the target’s principal facility, disclose questionable transfer payments between the target and its corporate affiliates, or unearth unfavorable information on the target’s CEO. However, no solution can be provided unless the fundamental facts are discovered in due diligence.
Types of Due Diligence Although due diligence practices are far from uniform around the world, they can be categorized roughly in two forms. What has been characterized as the “Anglo-Saxon” practice involves comprehensive legal and financial due diligence and significant disclosure before the signing of an agreement. The deal is embodied entirely in the documents, which set out in detail the rules governing the parties’ rights and obligations. Contrast this with the practice in much of the rest of the world, which involves more modest preliminary legal and financial due diligence with correspondingly limited disclosure.
The goal among many non-Western transactors, for example, is to build trust between the parties, leading to provisional agreements. These provisional agreements are followed by more intensive due diligence, culminating in a final agreement embodying a business relationship in which the contractual documents form one of the constituent parts. Thus, U.S. parties involved in outbound transactions with companies in countries in which Anglo-Saxon-style due diligence is not practiced often must obtain the necessary information and assurances by means other than the highly documented, full-disclosure process to which they are accustomed in their home market. International deal makers must be flexible and sensitive to the differences between what is acceptable in a domestic deal and what is acceptable in certain cross-border deals.
Who Is Involved in Due Diligence? The cast of characters in most due diligence efforts is likely to include company employees, the company’s traditional professional advisers, and those hired for their expertise in certain legal, tax, accounting, and operational issues present in the target’s home country. They include legal, financial, and operational professionals.
Legal pros. Because law has become highly specialized, today even midsized deals involve armies of corporate, tax, real estate, environmental, employee benefits, insurance, and other kinds of legal specialists. Although some of the due diligence legal work may be done in-house if the companies have sufficient legal staff, outside counsel is likely to be engaged in larger and more complex transactions. Over the years, business has been regulated increasingly by local and national governments as well as by treaty-created organizations like the European Union. As a result, regulatory resistance outside the United States can cause problems in what is, at least nominally, a purely domestic deal. These facts make lawyering an increasingly important part of the transactional due diligence scene.
Financial pros. In M&A and private placement due diligence, both the investor and the target typically rely on in-house personnel (CFOs and controllers) as well as their outside auditors. The underwriters and registrant in a cross-border public offering also use both in-house CPAs and outside CPA firms. One or both sides may use investment bankers and commercial banks, and other institutional personnel are certain to perform their own due diligence on the issuance of any debt required to fund the transaction.
Operational pros. The buyer must evaluate every material aspect of the target’s business. Key operating personnel (in-house managers or outside consultants) must scrutinize the target’s business and report their findings to the decision makers. The target’s prospective ability to help the investor execute its strategy should infuse every aspect of the operational due diligence process. Operational due diligence includes investigating the target’s intellectual property, its production (if a manufacturer), its sales and marketing efforts, its human resources, and the other operational issues described below. For financial investors, the problem of valuing these operations is magnified if the transaction represents the investor’s first foray into the target’s industry. Financial investors tend to be especially meticulous in their collection of independent financial data on the target’s industry. They generate some of it internally and rely on outside advisers for the rest.
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