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Mergers and Acquisitions – As Goliath takes over David – are the risks worth it?
capitalisation etc)[1]. But if you are a Goliath, a giant in your industry, looking to buy over a David, a startup or small medium enterprise, some understanding of the nature of such transactions and the risks this entails is fundamental.
In the first of a two-part series, we will explore the risks that Goliath will need to know before assuming such transactions and some of the steps that Goliath will need to consider prior to doing so. In our subsequent series, we will investigate ways in which David should get itself ready for such a transaction.[2]
Before we delve into the main consideration points, it is also important to highlight that we have assumed for the purpose of this article that the acquiring company (which is the larger company) (“Acquiring Company”) has done all financial due diligence and that not acquiring the target company (which is the smaller company) (“Target Company”) is not an option; otherwise some of the points listed here may be a deal-breaker which the acquiring company should consider as part of its decision whether to proceed with the deal.
We have assumed for the purpose of the article that the nature of the transaction is an asset sale rather than a share sale given that in most instances, the Acquiring Company will only look to certain assets of the Target Company as that is the real value to the Acquiring Company rather than taking on the entire Target Company.
DAVID LOOKS DIFFERENT FROM GOLIATH
In conducting due diligence of a Target Company, the Acquiring Company will usually draw out a list of questions and requests for information and documents which are consistent with the expectations of the Acquiring Company without realising that given the smaller size of the Target Company, there are documents and/or information which the Target Company do not prioritise in keeping as records.
To sample a few problems, this can take the form of:
Authors: Jeffrey Lim and Frederick Tay
Footnotes [1] Refer to my earlier article “Taking the driving seat on pharma and life science investments” for a possible explanation for this phenomena in the pharmaceutical and life science industry. [2] Please note that nothing in our series is intended to re-write the biblical story or intends to illustrate the concept that in such transactions, David and Goliath are on opposing ends. In most cases, the common interests should be the motivation behind the transactions.
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- poor data governance with no segregation of company and third party data and potentially intellectual property rights;
- incomplete inventory of assets, data and processes; and
- no or insufficient inventory of third party contracts that will need to be assigned or novated as part of the transactions.
Authors: Jeffrey Lim and Frederick Tay
Footnotes [1] Refer to my earlier article “Taking the driving seat on pharma and life science investments” for a possible explanation for this phenomena in the pharmaceutical and life science industry. [2] Please note that nothing in our series is intended to re-write the biblical story or intends to illustrate the concept that in such transactions, David and Goliath are on opposing ends. In most cases, the common interests should be the motivation behind the transactions.