Due Diligence Activity in the Midst of Lockdown Period
Impact analysis of COVID-19 in the due diligence procedure is a mandatory consideration
The global pandemic – COVID 19 has forced the globe to change their social pattern & working models. The companies are trying to cope up and survive through operating out of the remote working environment.
Despite this economic insecurity, the market for selling business still have positivity. Although, the speed is slow, but the sale transactions are moving forward. Every country’s government and regulatory authorities are introducing new schemes to mitigate the effect of the pandemic.
The due-diligence in the Merger & Acquisition (“M&A”) transactions helps to assess the potential risks involved in a transaction partly by investigating the obligations and liabilities of the target company or business. In the current scenario of a remote working environment, the intrinsic feature of due diligence to evaluate and assess transactions remotely based on the available information is a welcome proposition during the distress times. Due Diligence questionnaire is the pre-requisite to well-informed decision making & a structured document can aid in making investment decisions in midst of impact of COVID-19.
The M&A activity specifically the deal volumes although have been affected as a result of the impact of COVID-19, however, certain sale transactions remain ongoing particularly those in the Information Technology sector and which do not require any third-party financing.
The Corporates will need to re-invent & strategize their business models by identifying organic growth opportunities and focusing on investments in the digital and technology sectors. Innovative business models, collaborations and strategic alliances shall become the key to access new markets and customers. The Pandemic has restructured the working model with the Corporate Eco-system becoming increasingly dependent on virtual transactions, with operations being managed in a digitally enabled remote environment.
As a preventive measure to address any hostile take-overs, the regulators across the world have fortified the rules for foreign investments to safeguard national assets. The Indian Government has also taken cognizance of the situation by stating that all investments from neighbouring countries will require government approval, as a measure to curb opportunistic acquisitions.
As a result of the measures put in place globally to control the spread of the virus, it is important that Buyers need to ask the pertinent & relevant questions of their Targets or Sellers of their portfolio companies) (“target companies” or “target entity”) to fully understand how the target entity is dealing with the current situation and their plans to mitigate the business continuity risks.
The relevant considerations which should be included in the due diligence process in the midst of the lockdown period are mentioned as follows:
- Existence of a well-designed business continuity plan in the target company.
- Has the business continuity plan been tested or evaluated previously in any unforeseen scenario
- Capability of a target company to handle government emergencies like mandated travel restrictions, quarantines, and factory shutdowns
- Target Company’s measures to allow their employees to work from home & ability of its employees to deliver..
- The presence of force majeure or termination provision in the key contracts of the target company.
- Ability of the target company to streamline cash flows and working capital management
- Level of current trade restrictions & registering the impact on the business.
- The availability and the scope of warranty and indemnity insurance coverage. The warranty and indemnity insurance typically covers unknown or unforeseen risks only.
- The capability of the target company to address the potential supply chain impact from the pandemic.
- The target company’s information technology capability:
- to mitigate the cyber threats.
- to provide appropriate solutions for data redundancy and data recovery.
- The availability of remote working control procedures to aid the operations of key business functions generating revenue and optimizing the costs of the Company.
Tag: Due Diligence