A new KPMG study, entitled Due Diligence in Uncertain Times, explores how due diligence practices are changing in a current bearish M&A environment.
Give the substantial deterioration in market conditions over the past year it has become more difficult to establish the prospects of a target company, according to the report's findings.
As a result, downside risk has increased and greater attention needs to be paid to the liquidity, quality of debt and solvency of the target company, as well as its key suppliers and customers.
The turmoil in the global financial markets has impacted Asian due diligence processes. Seventy-five percent of all respondents said that buyers were now more cautious about undertaking a transaction. Respondents in more mature deal markets such as Australia, Japan and Hong Kong had seen the biggest change in sentiment.
In light of this increasingly cautious attitude to deal-making, 64 percent of respondents judged that due diligence exercises had become more detailed. Of those who agreed, 37 percent thought that a target's financial health would be the focus of further examination, while 29 percent considered that deal financials would also be scrutinised.
"Any acquisition involving distressed assets requires particular scrutiny and responsiveness, in order to manage risks. Downside risk has increased and increasing attention needs to be paid to the liquidity, quality of debt and solvency of the target company, as well as its key suppliers and customers," says Douglas Ferguson, Partner, Financial Advisory Services for KPMG China.
"Any issues uncovered can affect the valuation to a greater extent in a bear market environment. It also helps bidders to plan for post deal integration," he adds.
There is also an increasing focus on the identification and mitigation of post-deal issues.
"When the global economy was expanding and financing was readily available, the risk of overpaying for a deal was mitigated by the likelihood that strong economic growth would add to shareholder value over a relatively short period of time," says Kevin Chamberlain, KPMG's regional head for Transaction Services. "This is no longer the case. The respondents to our survey recognised that the global financial crisis and ensuing recession mean that conducting appropriate due diligence in an M&A deal is more important than ever."
Country risk has always been a concern in acquisitions, even more so in the current environment. Forty percent of respondents also said they would avoid countries they perceive to be risky; a further 40 percent would conduct additional due diligence on a target located within a certain country. Only 20 percent said they would expect higher returns to compensate for country-specific risk.
"There may be a silver lining in the fact that deals are taking longer," adds Mr. Ferguson. "Where due diligence are becoming more rigorous we might hope that higher-quality deals will be completed, with post-deal integration issues proceeding more smoothly. Ultimately, post-deal shareholder value erosion rates might just start to fall and this will restore some confidence to M&A markets."
To read KPMG China's new report, click hereor visit www.kpmg.com.hk
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