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Due Diligence
Šmídová, Jekaterina ; Králíček, Vladimír (advisor) ; Müllerová, Libuše (referee) ; Jiroudek, Jaromír (referee)
One of the main strategic goals of an owner is the growth of their company. To seek company growth in todays ever changing world, company owners and their management frequently turn to the discipline of mergers and acquisitions (hereinafter M&A). This M&A focus is evidenced by the sustained long term growth of the M&A markets, which for example in the Czech Republic alone amounted to a 38% increase between the years 2015 and 2016. The transaction decision making process takes place with an information deficit to the detriment of the buyer. 50% to 70% of transactions will be identified as not meeting the expectations of the buyer, and this is in large part due to the information deficit on the part of the buyer. This thesis takes as its subject due diligence, a tool that enables the buyer to mitigate (but never to fully overcome) the risks brought about by the information deficit. The due diligence process enables the buyer to gather information on the target company and to get to know it in greater detail prior to assuming the full risks of ownership. Due diligence becomes a key component of the M&A process, with direct impact on the transaction valuation and evaluation of the future performance of the target company. This thesis will provide all parties interested in the M&A process with an overview of both general and specific characteristics of the due diligence process and its key components. It will also widen the traditional understanding of the due diligence process, shifting it from a mere pre-investment check-up to a more complex and robust process, that includes the setup of post transaction integration guidelines. The purpose of this thesis is to provide an analysis of the due diligence process in its wider connotations, with emphasis on financial due diligence and post transaction integration. As part of this analysis the key milestones of the due diligence process were identified, and their influence on the increase of the likelihood of a successful M&A process is examined. Based on the stated purpose of this thesis a null hypothesis was formulated (and the analysis and evaluation of the said hypothesis is the goal of this thesis): Due diligence, in its traditional understanding, is a fundamental support tool for the successful realization of mergers and acquisitions. The methodology applied to the examination of the null hypothesis comprises the detailed analysis of information from specialized and academic publications, their theoretical evaluation and comparison to case studies. In line with the stated goal and its hypothesis, this thesis is structured into six chapters. The first chapter defines the term theory of a company and examines the basic economic reasons for the creation and existence of companies. The second chapter describes transactions dedicated to companies and focuses on the underlying reasons for undertaking transactions, and their effect on the methodology of due diligence. The third chapter defines due diligence, describes the process and its key components, and provides theoretical recommendations. The fourth chapter focuses on the practical undertaking of a due diligence process, and examines the applicability of the theoretical recommendations in real life. The fifth chapter examines the post-transaction components of due diligence. The sixth chapter focuses on examination of factors critical to the undertaking of a due diligence, and also on the contractual tools available for the mitigation of the inherent risks. The sources of information for this thesis are mainly, but not limited to, foreign specialized and academic literature focused on mergers and acquisitions, international and local published research, and own research undertaken for the purpose of this thesis. The detailed analytical work undertaken and described in this thesis enabled the evaluation of the null hypothesis and the completion of the stated thesis goal.
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