Four reasons why due-diligence is considered crucial in M&A transactions in the UAE

In the world of mergers and acquisitions (M&A), due-diligence is a critical component that is implemented more and more in the UAE due to the growing number of businesses and which may determine the future of transactions. Due-diligence refers to the comprehensive audit and analysis conducted by acquiring companies to assess the financial, legal, operational, and strategic aspects of a target company before entering into an M&A transaction. This article explores four reasons why the due-diligence process is considered to have a profound impact on M&A transactions in the UAE considering of the business expansion currently occurring in the UAE whether in SMEs or established companies.

Risk Mitigation

One of the primary purposes of due-diligence is to identify and mitigate risks associated with an M&A transaction. Through thorough examination of the target company's financial statements, contracts, intellectual property, compliance records, and other relevant documentation, purchasers can gain a comprehensive understanding of any potential liabilities or issues that may impact the transaction.

By identifying and assessing risks early in the process, purchasers can make informed decisions and negotiate appropriate and relevant terms with regards to the transaction. In some cases, the discovery of significant risks may lead to reevaluating or even abandoning the transaction altogether, saving the purchaser from substantial financial losses and legal complications.

Enhancing Post-Merger or Post-Acquisition Integration

Successful integration is vital to realizing the full potential of an M&A transaction. Due-diligence facilitates this process by providing purchasers with critical information that can guide integration planning and execution. By thoroughly assessing the target company's systems, processes, and infrastructure, acquiring companies can identify potential synergies, redundancies, and operational efficiencies.

Moreover, due-diligence allows acquirers to identify cultural differences and potential conflicts that may arise during the integration process. Understanding these factors early on helps in developing effective change management strategies, fostering open communication, and promoting a collaborative environment for employees from both organizations.

Informed Decision-making

Due-diligence plays a pivotal role in ensuring that acquiring companies make well-informed decisions. By studying and reviewing a target company's operations, market position, competitive landscape, and growth prospects, purchasers can assess the strategic fit of the merger or acquisition. They can determine whether the target company aligns with their long-term goals, whether it possesses complementary capabilities or assets, and whether the transaction is financially viable.

Furthermore, due-diligence allows acquiring companies to evaluate the target company's management team, culture, and human resources. This insight helps in understanding potential challenges and compatibility issues during the post-merger or post-acquisition integration process. Armed with comprehensive knowledge, purchasers can better negotiate the transaction terms, structure the transaction appropriately, and develop a roadmap for successful integration.

The Impact on Transaction Consideration

Due-diligence can have a significant impact on the contemplated consideration (or purchase price) of an M&A transaction, especially in the UAE. The thorough evaluation of a target company's assets, liabilities, intellectual property, and growth prospects enables acquirers to make informed decisions regarding the consideration of the transaction. By identifying potential risks and opportunities and determining the seller’s representations and warranties based on such risks, purchasers can adjust the transaction terms and pricing, ensuring a fair and equitable transaction for all parties involved.

Additionally, the due-diligence may uncover hidden or undervalued assets, intellectual property, or growth opportunities within the target company. This can enhance the overall value of the transaction and provide the acquiring company with a competitive advantage in the market.

The importance of due-diligence in M&A transactions inside the UAE cannot be overstated as per the current UAE market. It serves as a critical tool for purchasers to assess risks, make informed decisions, and drive successful post-merger or post-acquisition integration. By conducting comprehensive due-diligence, acquiring companies can mitigate potential risks, evaluate the strategic fit of the target company, and optimize the transaction value. Ultimately, due-diligence is and remains considered, at least in the UAE, as a foundation for a successful and mutually beneficial M&A transaction, creating value for all parties involved and therefore is highly recommended and crucial for the closing of a contemplated transaction.

By: Amir Fardoun | Senior Associate at CVML, Dubai