Due to the serious international crisis in the financial markets, companies are searching for capitalization alternatives to get around the problem of credit restriction and give continuity to their expansion projects. In this scenario, known mergers and acquisition operations (M&A) have been presented as the way out for some and as an opportunity for others. Be it through the entry of a new partner, sale of an equity stake or association, the instruments at the disposal of the parties is broad enough to allow the structuring of a business through an M&A transaction.

Structured during long working hours and a great amount of pressure, the production of an M&A deal, today more than ever, must involve an evaluation of the risks and vulnerabilities of the target company, based on the result of so-called due diligence.

During the course of this kind of process, an investor analyzes, together with its consultants, the policies in relation to the conduction of the company’s business and corporate governance, and how issues involving taxation, accounting, labor,, civil, competition, intellectual property as well as environmental matters are handled. Once information is made available, an investor should be able to extract consistent conclusions regarding the financial health of the company, as well as to quantify the so-called “hidden liabilities”. It is at this stage that the business risks and the transaction’s feasibility should be measured.

Idealistically, the information obtained during the due diligence process should pass the qualitative test, which should assess if what is been disclosed is true, actual, correct, objective, legal and complete, which is not always the case. In this scenario, the purchasing party should always ask questions and seek information, because an M&A deal involve party-to-party negotiation. However, due diligence is not only in the interest of the buyer. It is also in the interest of the seller, as an anticipatory measure, as it is always a positive initiative to verify the problems of your business before the buyer does. After all, the information analyzed will have a direct impact on the price of the target-company.

The importance of a due diligence process can also be noticed in a public offering of securities, under which, its applicable regulation, meant to protect the public interests, specifies that information will be fully and accurately transmitted to the investor. However, to trust in the market’s transparency, an investor has to believe that the information made available is adequate and complete.

The evaluation of the assets and liabilities of the target company, especially now, with the recent accounting changes due to the enactment of Law 11.638/07 (combined with CVM Instruction 469/08), is at the core of the negotiations.

Companies have begun to assess their assets and liabilities by their market value or by adjustment to present value. This evaluation methodology, pending specific regulation by the Brazilian Securities and Exchange Commission (CVM), has increased its relevance in the M&A field because, in a scenario of instability such as the current one, the market interpretation can distort the value of the business assets and liabilities and affect its pricing. As this matter is still subject to CVM’s scrutiny, it is expected that, by the time CVM enacts a ruling in this regard,said federal autarchy will present alternatives to minimize this distortion and provide safeness to market participants. At this stage, it is reasonable to assure that the new rules will demand companies to be even more cautious when disclosing information to the market.