Uncovering black holes and hidden value
While there are significant financial and strategic benefits in an acquisition, it also brings substantial risks that need to be systematically identified and properly managed. Too often, acquirers may become overly enthusiastic in, or feel pressured into, closing a deal and end up glossing over potential pitfalls and giving in to too many negotiation points. Global merger statistics reveal that more than 60% of M&A destroy value for the acquirers. Some of these could have been avoided with effective pre-acquisition due diligence.
“Black holes” in the form of undisclosed risks, hidden liabilities or onerous commitments are latent in most acquisitions. Acquirers may also over-estimate synergies, base deals on unrealistic growth target and persist with acquisitions despite negative or incomplete information. Due diligence can be used to identify deal breakers, better analyse financial and operational health, set negotiation parameters, challenge synergy and valuation assumptions, and assess risks.
In addition to flagging up downside risks to a deal, an effective due diligence should also uncover potential upside that can be exploited, e.g. operational improvements, cost savings, revenue maximisation, turnaround/restructuring/synergistic opportunities, capital optimisation and better asset utilisation. Thus, a properly executed pre-acquisition due diligence enhances a deal by uncovering hidden values and other reasons that may inspire the potential acquirer to pursue a deal more aggressively.
Although a straightforward exercise, too many acquirers (and even due diligence accountants) see due diligence as just an audit exercise and end up missing the real value of a deal.
|What do we look out for during due diligence?
- Deal Breakers
- Valuation Issues
- Negotiation Points
- Identifying Hidden Value
- Warranties, Transition & Completion Issues
- Integration & Separation Issues
Meeting Your Needs
PwC’s track record speaks for itself – over 500 due diligence projects and more headline deals than any of our competitors.
Our strengths are in managing large and complex cross-border due diligence exercises, with a focus on China, India and ASEAN markets. In the past year alone, we performed 67 due diligence projects across the region with an aggregate transaction value of about S$23 billion. Objective, sharp and targeted, we strive to provide a structured and disciplined process to assist in enhancing the value of all deals, through an integrated suite of services provided by our team of multi-disciplinary experts.
Financial & Tax Due Diligence
- Analyse and validate the key issues such as:
- Value drivers and operating cash flows
- Net debt position/working capital
- Quality of earnings and assets
- Liabilities, contingencies and commitments
- Direct and indirect tax contingencies
- Related party transactions/stand-alone costs
- Provide inputs to support your offer and enhance your negotiation position
Assist the vendor, or the target, prepare for sale by addressing the concerns and issues that may be relevant to even the most demanding purchaser, thus providing greater control over the sale process, options to improve critical value issues, reducing disruption and potentially justifying higher offers.
- Identify risks and propose how to deal with them in price adjustment and legal agreements
Leading Technical Service Company
- Financial & Tax Due Diligence
Our client was one of the world’s top three providers of technical services which planned to expand its presence and offer a complete range of services across Asia. PwC was engaged as their advisor in their acquisition of two regional entities as part of this plan. We provided an integrated lead advisory, deal structuring, due diligence and post-deal integration advisory services.
After significant negotiations, our client secured the deal in a global auction attracting over 30 interested parties. Our intimate knowledge of the mindset of the local government and experience from other auction processes enabled PwC to help position the client attractively and to secure exclusivity immediately after the second round of bidding.
In the course of our due diligence work, we identified critical success factors, hidden values and improved our client’s understanding of deal issues so that they could make better informed decisions. We also identified substantial postdeal integration issues and opportunities which we subsequently assisted the client in their execution. As an integrated team, we were able to co-ordinate the various workstreams seamlessly, which ultimately contributed to the client’s ability to win the deal.