Performing an Audit, Investigation & Verification in M&A

The purpose of the M&A deals is to increase the confidence of intended users in the financial statements, which can be achieved due to audit, investigation, and verification.

How to Make an Audit, Investigation & Verification in M&A?

The aggravation of the competition between the largest international corporations is forcing them to expand the scale of operations to acquire some companies, establish control over others, and implement joint investment projects with individual partners. The motives of mergers and acquisitions, despite their diversity, are significantly inferior to the variety of forms of their concrete implementation. The main economic reasons for mergers and acquisitions are:

  • savings due to the increase in the scale of activities;
  • competitive advantage or increase in market share;
  • diversification of products or services;
  • improving the quality of management;
  • cost reduction.

Mergers and acquisitions provide savings by centralizing certain activities, such as marketing research, expanding research lines, or using generic promotional materials. The intensification of the processes of data room due diligence of companies is a hallmark of modern economic development. Mergers and acquisitions are viewed by many companies as a means of optimizing production assets in response to changing market conditions in order to achieve a competitive advantage. Experts who are engaged in research in this area try to formulate and substantiate their universal algorithms for the processes of mergers and acquisitions of enterprises. 

Obviously, in a friendly transaction, the target company will be much more willing to provide the requested information in order to obtain a certain price. Although in this case, the acquired company may not always meet the buyer halfway, trying to hide information that may affect the price downward. In a situation with a hostile M&A transaction, the management of the target company is likely to provide only the data that is required to be provided in accordance with the law, even despite the threat of litigation.

The Most Integral Parts of M&A Deals

In the context of globalization and financial instability, for many companies, mergers and acquisitions are an integral part of corporate strategies. Business growth from internal sources of accumulation is sometimes slow and uncertain. Through mergers and acquisitions, a company can acquire a powerful impetus for development. On the other hand, mergers and acquisitions act as an instrument of competitive rivalry for resources, sales markets, distribution channels, technologies, and know-how. The competitiveness and stability of its position in the market depend on how effectively the company uses external opportunities to solve its internal strategic tasks.

When assessing the value of companies in mergers and acquisitions of companies, as well as calculating the cost-effective for the company initiating the transaction, the authors recommend analyzing the impact on the cost of alternative development strategies of the company – internal growth, maintaining the company in its previous state, the possibility of merging or acquiring a potential counterparty to the transaction competitors of the company. When justifying the feasibility of a transaction and making a decision to start its implementation, the authors advise comparing the potential benefits that the initiating company receives from the transaction with the potential benefits that competitors may receive.

This means that general approaches to the financial analysis of a company are a mandatory minimum, which must be accompanied by additional analysis due to the specifics of a particular transaction. This additional analysis can (and most likely will) be based on some other information that is not contained in the standard financial statements but is revealed in the course of legal and accounting audits.