A Practical Simulation of the Financial Due Diligence Process in Mergers and Acquisitions A Case Study of MOMERT Ltd.
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| Dokumentumtípus: | Diplomadolgozat |
| Kulcsszavak: | accounting adatelemzés - adatbányászat értékelési adatok felvásárlás(ok) középvállalat |
| Online Access: | http://dolgozattar.uni-bge.hu/58354 |
| Kivonat: | This thesis conducts a comprehensive simulation of the financial due diligence process inmergers and acquisitions (M&A), combining an extensive theoretical framework with afocused empirical case study of MOMERT Ltd., a medium‐sized Hungarian manufacturer ofsmall appliances. In the theoretical phase, it first defines M&A as strategic tools for corporategrowth, diversification, and operational synergy, before tracing the historical evolution of duediligence from its legal origins to a modern, multidimensional practice.A model of due diligence environments is introduced, distinguishing between tangible andintangible assets in both internal (e.g., cash, plant equipment, receivables, inventory;leadership quality, corporate culture, personnel loyalty) and external contexts (e.g., marketshare, supplier contracts; brand awareness, customer loyalty), highlighting the criticalimportance of evaluating intangible resources to capture the full spectrum of acquisitionvalue. The core of the theory delves into financial due diligence, presenting a step-by-stepapproach to analyzing a target’s financial health. Detailed guidance is provided on reviewingthe three principal financial statements—balance sheet (verifying realistic asset valuations andcomplete disclosure of current, long-term, and off-balance-sheet liabilities), income statement(disaggregating recurring versus one-off items, assessing revenue and expense trends, andscrutinizing earnings quality), and cash flow statement (examining operating, investing, andfinancing activities to gauge true liquidity and free cash flow). This analysis is complementedby ratio analysis, which standardizes performance measurement through profitability ratios(ROA, ROE, net profit margin), liquidity ratios (current, quick), solvency ratios (debt-to-equity, interest coverage), and the efficiency ratios (asset turnover, inventory and receivablesturnover). The necessity of examining supporting notes to unearth the hidden contingencies,aggressive accounting policies, and contingent liabilities is also emphasized. Building onthese statement and ratio analysises, the thesis surveys a suite of valuation techniquesessential for M&A negotiations. Discounted Cash Flow (DCF) analysis is portrayed as thefundamental valuation cornerstone, sensitive to assumptions around growth and discountrates; Comparable Company Analysis and Precedent Transaction Analysis provide market-based benchmarks requiring careful peer selection and adjustment for size, growth, and therisk profile differences; Leveraged Buyout (LBO) modeling introduces a private-equityperspective emphasizing debt capacity and equity returns; and asset-based and liquidationvaluations serve as important cross-checks, particularly for asset-intensive or distressedtargets.The roles of financial advisors and auditors are also described within this framework: advisorscontribute strategic guidance, valuation expertise, and fairness opinions under regulatoryregimes such as MiFID II and the Hungarian Capital Market Act, while auditors deliverindependent assurance of financial statements under EU audit directives and local accountinglaws, ensuring methodological rigor, objectivity, and compliance. A dedicated chapter onchallenges in financial due diligence identifies the five core obstacles—data quality andreliability (creative accounting, cross-border reporting differences), earnings manipulation(premature revenue recognition, expense deferrals), hidden liabilities (off-balance-sheet items, environmental and litigation risks), regulatory and accountingdivergences (IFRS versus local GAAP), and information asymmetry (selective disclosure bymanagement)—underscoring the imperative for sustained professional skepticism andverification across multiple data sources.In the empirical phase, the thesis applies these theoretical constructs to MOMERT Ltd.’s 2023annual report. A balance-sheet assessment reveals a slight (1%) decline in total assets drivenby a 3% decrease in fixed assets, offset by modest growth in current assets due to higherreceivables and cash balances. Equity has contracted by 9% following a net loss, yet remainedrobust relative to share capital, while total liabilities rose by 18%, reflecting increasedborrowings to finance their strategic investments. The cash-flow analysis shows a positiveoperating cash flow of +32,334 k HUF despite the losses (owed to non-cash charges andworking-capital adjustments) while investing activities recorded a net outflow of 95,044 kHUF on capital expenditures and financing activities yielded +65,989 k HUF from new debtissuance, resulting in a net +4,585 k HUF increase in cash. Ratio analysis positionsMOMERT as liquid (current ratio 2.64, quick ratio 1.07) and operationally efficient (assetturnover 0.96) but under pressure on profitability (ROA –5.90%, ROE –10.11%) and interestcoverage (–5.39), reflecting macroeconomic “headwinds” and high finance costs. Importantly,this empirical application represents only a minor portion of the overall due diligencesimulation; the thesis stresses that while real-world financial data brings the methodology tolife, the most important share of due diligence lies within the theoretical frameworks,procedural rigor, and analytical tools developed. By synthesizing exhaustive theoreticalconstructs with a targeted case study, this thesis tries to showcase both a practical roadmap fortransaction practitioners and a scholarly contribution to the evolving field of financial duediligence. |
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