Mergers and acquisitions (“M&A”) are those operations related to the transfer or combination of assets and properties between two entities or organizations. These operations may involve the complete acquisition of a company, the merger to create a new entity or the total or partial purchase of its most important assets.
M&A transactions are great strategic opportunities for organizations to strengthen their market position and increase their value by reducing operating costs and combining resources and talents, thus driving the development and innovation of new products and services.
Mergers and acquisitions require careful planning and execution to ensure a successful outcome; and to achieve this, two essential tools are used to assess the viability of this operation: Due Diligence and Financial Modeling under US GAAP.
Due Diligence is the process of investigating and analyzing the financial, legal, fiscal, operational and strategic aspects of an organization before carrying out the acquisition or merger of a company, which allows identifying possible risks, opportunities and synergies in the different aspects mentioned above. In particular, this process is dedicated to the review of financial statements, audit reports and other relevant documents.
Financial Modeling consists of creating different models of an organization that is about to be acquired or merged in order to analyze its projected financial situation, forecast its future performance, evaluate risks, and support investment or financing decisions. These models are prepared based on the “Generally Accepted Accounting Principles in the United States (“US GAAP”), which are the strictest and most widely recognized accounting standards worldwide. By following these principles, the model ensures transparency, accuracy and consistency in a company’s financial position, reflecting aspects such as revenue recognition, asset valuation, liability classification and financial statement presentation.
Due to the complexity and strategic relevance of these processes, Due Diligence and Financial Modeling under US GAAP, both must be carried out by a team of professionals with expertise in the field prior to the business combination to ensure an adequate transition in M&A transactions. Subsequently, the financial performance of the merged entity is duly monitored to evaluate whether the transaction was successful.
In a nutshell, Due Diligence identifies risks and opportunities, while Financial Modeling provides financial projections based on US GAAP, thus allowing to assess the value and potential of the organization(s) that intend to carry out the M&A transactions.
