A business merger can be a very exciting transaction. The organizations proposing the merger can potentially expand their market share. The companies can share their valuable intellectual property and talent.
Mergers are an efficient means of growing a company, but they also come with significant risks. Any large business transaction requires thorough due diligence, and that is especially true in a merger scenario. Why is a thorough investigation necessary before committing to a merger?
The new company is legally vulnerable
Many mergers are ultimately unsuccessful. They either face opposition during the transaction that results in the merger failing or issues that lead to the combined company failing. In some cases, the due diligence process could help companies identify and avoid complications. They can either cancel the transaction or implement proper protections to minimize the risk involved.
For example, a proposed merger might lead to intervention by regulatory officials if the resulting combined business has too large of a market share. Research into the market and other mergers could identify when a merger might draw attention as a possible violation of antitrust regulations.
Other times, the due diligence process could help identify signs of falsified financial records. One business may have tried to hide its growing debts, and the combined organization is liable for the debts of both businesses.
Due diligence can also help identify issues that could lead to consumer lawsuits or legal claims brought by employees. In either scenario, the newly formed business is likely liable for the mistakes and misconduct of the businesses combined during the merger.
Having assistance during the due diligence process can take some of the risk out of a company merger. Leadership may need help identifying risk factors that might undermine the success of a proposed merger.