The Hindu Business Line : Give diligence its due

TO BE DILIGENT is to be hardworking, industrious, assiduous, painstaking, meticulous, conscientious, thorough, attentive, methodical, careful, and much more, as the hardworking synonym finder of Word would inform. One would often like to assume that honchos in company boardrooms act scrupulously when deals and decisions are made. When that assumption fails, and diligence dithers, soon enough results show red and much-hyped mergers flounder as quickly as celebrity marriages. So, here is a `definitive guide', edited by Arthur H. Rosenbloom, titled Due Diligence for Global Deal Making.

The book, published by Vision Books (www.visionbooksindia.com), has chapters on strategic, operational, financial and accounting, legal, tax and people due diligence. International terrorism and intellectual property rights are two important dimensions that the preface mentions as distinguishing features of 21st century deals.

What is due diligence? Chapter 1 defines: "Transactional due diligence is the investigation by an investor or its advisers of the accurate and complete character of the target company's business."

What is `target'? It may be a candidate for acquisition, JV, strategic alliance partner, or a company's minority interest. It does not stop there, because target companies should also perform a similar exercise. Two broad types of due diligence are: Anglo-Saxon practice involving "comprehensive legal and financial due diligence and significant disclosure" before signing the agreement; and what the rest of the world practises, involving "more modest preliminary legal and financial due diligence with correspondingly limited disclosure."

In `strategic due diligence', Geoff Cullinan and Tom Holland write how strategy precedes due diligence: "Transactions should be made only when they improve the strategic position of the investor's existing business or add to its core competencies." Analyse the 4 Cs, they write, referring to "costs, customers, competitors and capabilities."

In the chapter on operational due diligence, written by Linda D. Arrington and team, there is a discussion on mapping value-creation process: "Such a chart should map supply chain, facilities, personnel, and products and services produced against sales, distribution, and marketing channels for the combined enterprise."

Jorge M. Diaz's chapter on financial and accounting due diligence, distinguishes between the two closely related spheres: "Financial due diligence is the process by which the investor determines whether the investment in the target makes business or financial sense... Accounting due diligence is more closely directed at the truthfulness and completeness of the target's accounting information." CAs usually have a greater role to play in this area and so expert knowledge is a must in F&A DD.

Next comes legal due diligence written by Norman J. Resnicow and Clifford A. Rathkopf, where the aim is to prove `the negative' — by looking `for the proverbial needle in a haystack.' Do not assume your laws hold good in a different country, and run through draft agreements with a fine-toothed comb.

A caution: "The greatest risk of legal mishap in the cross-border deal is in failure of communication, especially where a significant part of due diligence takes place in other countries." Targets may speak different languages, so have a languages clause — "specifying which language version will be considered official or paramount, and whether translations have any interpretative relevance."

Robert T. Bossart writes about an important area for accountants, viz., tax. This is a balance between tax compliance review and future tax planning, he notes. Again, there is need for balance between federal and non-federal taxes: "Too many investors focus solely on taxes at the national level and then only on income taxes." But there are also state taxes, VAT, taxes on property, transfer, mortgage, and so on. The focus of Cynthia N. Wood and Richard C. Porter is people and organisational due diligence, just the things that lead to ego clashes and culture collapses when ignored. Soft issues, but don't brush them aside as unimportant.

The last chapter is on investigative technology and knowhow by James B. Mintz. Some key questions that cry for answer in any due diligence process are the tricky ones such as:

"Is the target associated with questionable people? And was the company or its executives implicated in a specific scandal?" A must if you don't want to end up with tainted stuff in your hands.

BooksOfAccount@TheHindu.co.in

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