Why is it necessary to conduct due diligence before completing an M&A transaction?

Mergers and acquisitions (M&A) provide a rather rapid means of expanding an existing business.

Synergies may be developed, new technologies may be accessed without the need of long-term

research, and new product lines or distribution channels may be acquired.

However, the majority of M&A deals, envisaged to be successful at the set-up phase, fail to achieve

their anticipated benefits. According to surveys and research carried out by economic experts and the

business press, only a quarter of M&A transactions are successfully completed, while the rest of the

deals either fail, the transactions take at least 1-2 years, non-expected costs are incurred following the

closing, or the cutting of expenses that was envisaged to be achieved are not realized etc.

There are several reasons why success is not achieved: the difference between the legal environments,

inappropriate partner selection, resistance to the deal in the target, unforeseen problems occurring at or

after the closing. A number of these problems can easily be avoided by conducting an effective,

careful and thoughtful due diligence (DD) investigation on the target. The success of the deal is never

guaranteed, but without due diligence, the risk of failure is significantly higher.

DD is normally undertaken by the buyer in an attempt to obtain an understanding of the business that

it aims to acquire and any such risks associated with the business. Ultimately, due diligence is the

definitive means to seek and gain information that the buyer will use in order to decide on the

completion of the deal as well as to negotiate the final price.

As the outcome of the due diligence may well provide for the ground of the failure of an M&A

transaction, the seller will want to isolate certain information away from the potential buyer. In

particular, the seller will not want to disclose commercially sensitive information such as customer

basis and prices. Hence, the potential buyer (investor, creditor) should lay down in the earliest possible

phase the definitive scope of the fields to be scrutinized during the due diligence by drawing up and

delivering to the target’s management a DD Checklist.

The due diligence team consists of the professionals of various sectors targeted to be investigated

during the DD, from attorneys through accountants and auditors to investment bankers and

environmental experts. The sectors to be inspected may be unlimited, including financial information,

corporate data, company law questions, IT infrastructure, marketing, environmental protection issues,

intellectual property, taxation, administrative obligations, labor law questions, employees, undertakers,

ongoing lawsuits etc.

After completing the investigation phase of the DD, the due diligence report and related legal opinions

are to be drawn up summarizing the findings of the scrutiny and the path that the buyer is

recommended to take in the light of such findings. Furthermore, on the basis of the DD report, new

and more information may be requested in the course of the negotiations, or the risks may be settled

by agreements. If the risky conditions are not agreed upon, the deal can be subject to reconsideration,

or the transaction may even fail.

When selecting your Hungarian law firm to carry out the legal due diligence, you must act carefully in

choosing the one that has not only the technical capability but the infrastructure and foreign language

skills required to manage the due diligence and any potential later phases of the transaction with

precision and speed. KK Legal, as a business-minded law firm in Budapest, Hungary, provides

complete legal due diligence support to companies that are considering either buying the majority

stake or assets of another corporate entity or embarking on a merger.

For further questions and for references, please kindly contact the law firm’s partners, Mr. Zoltan

KATO at zoltan.kato@kk-legal.com or Mr. Gyula KOROSY at gyula.korosy@kk-legal.com.