The Importance of Financial Due Diligence in Mergers and Acquisitions


The Importance of Financial Due Diligence in Mergers and Acquisitions

Financial due diligence is an essential step that businesses must undertake before making any significant financial decision. It involves a comprehensive review of the target company’s financial records, tax returns, and other relevant information to assess its financial health, identify potential risks and opportunities for value creation.

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One notable success story is the acquisition of WhatsApp by Facebook. In 2014, Facebook announced that it would be acquiring WhatsApp for $19 billion, the largest acquisition in the company’s history. Before completing the acquisition, Facebook conducted thorough financial due diligence, which identified that WhatsApp had a solid financial footing, with a growing user base and revenue streams. The acquisition of WhatsApp helped Facebook to expand its reach and access to mobile users, enhancing its revenue streams.

In Kenya, a success story of the benefit of conducting financial due diligence can be seen in the acquisition of Chase Bank by SBM Bank. After Chase Bank was placed under receivership in 2016, SBM Bank expressed interest in acquiring the bank’s assets. Before completing the acquisition, SBM Bank conducted extensive financial due diligence, which helped identify potential risks and liabilities that could impact the bank’s financial health. As a result of the due diligence, SBM Bank was able to acquire the assets of Chase Bank and turn it around, restoring depositors’ confidence and growing its customer base.

In contrast, a notable failure story of not conducting financial due diligence is the In 2019, WeWork, a co-working space provider, postponed its initial public offering (IPO) after investors raised concerns about the company’s valuation and governance structure. The IPO ultimately failed, and WeWork’s valuation plummeted from $47 billion to $8 billion. The company’s financial statements had revealed significant losses and questionable accounting practices, but a lack of proper financial due diligence by investors had allowed WeWork to continue raising billions of dollars in funding. The failure of the IPO demonstrated the importance of conducting thorough financial due diligence to identify potential risks and weaknesses in a company’s financial statements.

On the other hand, a failure story of not conducting financial due diligence in Kenya, In 2015, the National Bank of Kenya (NBK) reported a KES 1.2 billion ($11.2 million) loss, which was attributed to fraudulent activities and poor loan management. An internal audit later revealed that several loans were given without proper due diligence, and some of the loans were issued to customers with poor credit history. The bank also had a significant number of non-performing loans that had not been adequately provisioned for, leading to losses.

The situation at NBK could have been prevented or mitigated if proper financial due diligence had been conducted. Financial due diligence would have revealed the bank’s weak loan management practices, poor credit evaluation procedures, and the lack of adequate provisioning for non-performing loans. As a result, the bank could have implemented corrective measures to address these issues before they escalated to significant losses.

In conclusion, financial due diligence is critical for businesses making significant financial decisions. The success stories of companies that conducted due diligence demonstrate the importance of thorough financial analysis, while the failure stories of companies that did not serve as a cautionary tale of the risks of neglecting due diligence. In today’s complex business environment, businesses that conduct financial due diligence stand a better chance of making informed decisions, mitigating risks, and creating value for their stakeholders.

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