M&A due diligence and the emphasis on internal control systems of the target company

Abstract

As global financial markets have been opening to the public, there has emerged a need for transparency of internal controls in public companies. At the same time, the mergers and acquisitions (M&A) activity has been in a steady uptrend throughout the business cycles for the past several decades. Through increased capital involved in these transactions, transparency can benefit the market at large.

To add to the extensive number of studies made regarding pre-decision controls of the acquiring company, this thesis focuses on the internal controls of the target company. The objective is to determine: How in-depth are these systems examined during the transaction, and which factors influence the importance of due diligence on them?

The thesis consists of a meta-analysis of studies on the cost-benefits of internal control in limited liability companies, how internal controls are considered during the M&A due diligence process, and the implications for post-deal performance. In addition, this thesis includes a field study through in-person interviews with four professionals.

This thesis found that as the research on the link between corporate governance and company performance can be seen increasing, many studies have still been inconclusive. The importance of internal control systems varies greatly between industries and particular organizational traits, and it also translates to M&A due diligence. In this thesis, it has been concluded that most M&A transactions are already labor-extensive, and internal controls are rarely examined directly. In most cases, the limited resources and time in hand are seen better in use elsewhere than in the targeted assessment of internal controls of the target company.