Due Diligence!!
This term is most often associated with mergers of companies. For example, a large corporation is going to acquire a smaller corporation and the shares of the small corporation will be converted to shares in the large corporation. Some value has to be attached to the shares of the smaller corporation as a fair value, e.g. $5.11. The small corporation must provide the evidence, such as, an open book audit of all corporate records to the larger corporation. The large corp wants to verify what it is getting. Thus, the $5.11 value of the small corp can be verified as true and supportable.
On the day of record, where the merger is official, there then follows , one year of due diligence, whereby the performance of the small company is under great scrutiny to validate that all the claims they made before the merger are true and that there were no hidden liabilities or adverse actions, such as pending law suits for sexual harassment or whatever. If there were to be discovered some misrepresentation on the part of the smaller firm, which leads to a lower valuation of their stock, then the large firm has recourse to effect the lower rate, say $3.70 or to even cancel the merger in toto.
If at the end of the one year due diligence period, the small firm lives up to its claims of value. Then the merger is completed and no negative ramifications can be effected by the larger firm.
Our due diligence is to do as much valid research as possible to determine the true nature of a company's share price. Due diligence is a search for true value and to validate the good will and value of a company.
Whew-----I'm certainly long-winded, hope that helps, Shorty. |
