In a cautious M&A market, investors devoting more time to due diligence

• A new KPMG study shows due diligence is being conducted more rigorously and taking slightly longer, on average, since the onset of the financial crisis.
• Over 70 percent of survey respondents in Asia Pacific said they had become more cautious about making acquisitions and, consequently, over 60 percent believed due diligence was becoming more detailed.
• Forty percent would conduct additional due diligence on a target located within a certain country. More than half of respondents (63 percent) agreed that a comprehensive due diligence process can alleviate many of the risks associated with conducting a transaction in Asia.

It suggests that due diligence is taking slightly longer on average since the onset of the financial crisis, a point cited by 64 percent of respondents to the KPMG survey. Due diligence is becoming more detailed in certain respects relating to liquidity, quality of debt and solvency of the target company.

However, the findings of the KPMG report suggest that due diligence still tends to be conducted according to fixed timeframes and clearly defined terms and conditions. A narrow majority of respondents (55 percent) believed that despite the onset of the credit crunch and the increased caution displayed by both buyers and financiers, the basic due diligence processes had not changed.

As such, it is becoming more common for supplementary work to be conducted on behalf of acquirers as people are more cautious and time pressures are less intense. This additional work can include forensic investigations where there is a suspicion of financial mispractice, or additional commercial and market studies to understand the long-term position and viability of a target.

Apart from taking more time to assess a deal, there is also an increasing focus on the identification and mitigation of post-deal issues.

"When the global economy was expanding and financing was readily available, the risk of overpaying for a deal was mitigated by the likelihood that strong economic growth would add to shareholder value over a relatively short period of time," says Kevin Chamberlain, KPMG's regional head for Transaction Services. "This is no longer the case. The respondents to our survey recognised that the global financial crisis and ensuing recession mean that conducting appropriate due diligence in an M&A deal is more important than ever."

"Downside risk has increased and increasing attention needs to be paid to the liquidity, quality of debt and solvency of the target company, as well as its key suppliers and customers," adds Honson To, head of Financial Advisory Services for KPMG China. "Any issues uncovered can affect the valuation to a greater extent in a bear market environment and any acquisition involving distressed assets requires particular scrutiny and responsiveness, in order to manage risks."

"There may be a silver lining in the fact that deals are taking longer and due diligence is being taken more seriously," continues Mr. To. "Where that is the case we might hope that higher-quality deals will be completed, with post-deal integration issues proceeding more smoothly. Ultimately, post-deal shareholder value erosion rates might just start to fall and this will restore some confidence to M&A markets."