A financial due-diligence model to assess merger and acquisition viability
Mergers and acquisitions (M & A) are a big part of the corporate finance world. Everyday investment bankers arrange M & A transactions, which bring separate companies together to form larger ones. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies; at least that's the reasoning behind M & A. Before an M & A transaction, companies usually require some kind of evaluation of the company that is to be acquired. This evaluation is then used to determine whether the transaction should take place, and what the target price should be for the acquiring company. The most commonly known method used to do such an evaluation is known as a due diligence. The due diligence process can be a long drawn out process, which can be extremely disruptive to an organisation. Due diligences can take several months to complete in a complex organization. The issue surrounding the due diligence process is that it is not a standardized procedure and each organization or specialist carries out the due diligence process differently, when considering a merger and acquisition. The problem is that there is no one structure, format or model which can make the necessary information available to the decision-makers of the acquiring company without going through the complete due diligence process. If a financial due diligence model was available, which could give pertinent information to decision-makers, huge due diligence costs could be saved. Therefore the main study objective of this dissertation is to determine the value of a financial due diligence before an M & A, and whether a financial due diligence model would be beneficial to decision-makers of manufacturing companies. The study will lead to the development of a financial due diligence model that can be used by South African manufacturing organisations for M & A. A combination of the theoretical techniques, literature review data and the empirical study data will be used to determine what should be included in a financial due diligence model, which can be used by decision-makers to determine whether or not to pursue the merger and acquisition.