Yes, due diligence is an investigation into the historic performance and acts of the company, therefore, the extent to which history needs to be dwelt into and the level of investigation is determined by the type of transaction. It would be different for a business acquisition as compared to a financial investment as compared to a demerger. We outline the broad difference between these cases:
In an acquisition the shareholders of the target would be exiting the company in toto and the incoming investor is generally looking at the transaction from a strategic view point. Therefore the diligence would have to be conducted with a view to assess the likely impact on business operations as a result of the exit of target shareholders (impact on customers, suppliers, employees etc.,). Further, given that it is a strategic transaction the focus should be to identify areas which overlap with the investing company and find out ways to work around the same.
As the name suggests it’s a financial investment made with an objective to make financial gains by selling the stake in the company after a particular period. Given that the investor has a short term view the focus is on the business aspects and the growth plans expected by the management. Historical numbers are looked into to corroborate the numbers used in the financial model used for the purpose of arriving at the deal value.
In case of a demerger diligence the assets and liabilities that should be transferred in the course of demerger are identified and any other potential liability that may arise in the course of demerger. Another area is identification of the structuring for the demerger to be adopted after careful evaluating the impacts under the different scenarios.