Abstract
The effectiveness of due diligence (DD) processes, and whether they contribute to merger and acquisition (M&A) success or failure, is an ongoing debate in auditing and assurance research. This article contributes to the debate by examining traditional DD in South Africa (SA) using a qualitative research approach. A data set of traditional DD processes was compiled from the literature, which formed the basis for an interview agenda which was conducted with corporate finance and audit practitioners in SA. The findings indicate that the DD process is considered to be an evolving process, where DD processes of the last decade are considered to be significantly different from DDs required in acquisitions today. Traditional DD, while considered to be indispensable, has its shortcomings in execution rather than the model. At present, it is found that much focus is placed on accounting and legal aspects, while other critical issues are neglected; macro-environment, management information systems, marketing and productions are such overlooked aspects. This article proposes a critical new trend in the forms and manner of the currently flawed DD processes in SA which is useful for DD practitioners in the present and in the future for local M&A success.
Highlights
Due diligence (DD) is the process that an acquiring party undertakes in a merger and acquisition (M&A) transaction to investigate the target party in order to make an informed business decision on whether to proceed with the transaction (Wangerin 2016)
Using information gleaned from the literature review, a data set of traditional DD processes was compiled, which formed the basis for an interview agenda
What is of interest is that according to the Dealmakers Report (2016), all the participants still dominate the M&A market in South Africa (SA)
Summary
Due diligence (DD) is the process that an acquiring party undertakes in a merger and acquisition (M&A) transaction to investigate the target party in order to make an informed business decision on whether to proceed with the transaction (Wangerin 2016). Research conducted by Sherer et al (2016) found that many companies define and understand the term ‘due diligence’ mainly as a study of the profit and loss and the financial position of the acquired company; with this in mind, DD processes have traditionally been restricted to a review of financial, legal and limited technical aspects (Moeller 2009; Sherer et al 2016) This has resulted in many executives relying on only financial reports to make their decisions, without taking into account other factors (Howson 2016; Moeller 2009; Sherer et al 2016). DD includes data analysis and analysis of every aspect of the value chain of the acquired company, including subtle issues such as cultural fit and integration, minimising any reputational risk and communication with employees (Howson 2016; Papadakis 2007)
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