During the process of an M&A transaction or an equity investment, the investor occasionally fails to obtain certain information directly from the target company for various causes before signing the Letter Of Intent (LOI). Under this circumstance, the investor needs a third-party consulting/research institution to conduct a Market Due Diligence (MDD) in order to investigate the target company, competitive landscape and overview of the market. The third-party consulting/research institution shall also deliver an independent Market Due Diligence Report as the support for decision-making. The Market Due Diligence aims to reveal the practical situation of the target company and detect relevant investment risks at an early stage. In addition, the primary function of MDD is to collect relevant information of the competition landscape about the business of the target company, which is helpful to assess the market position and valuation of the target company.

Scope of applicability

1.Target Screening and Identification 

   At the stage of screening and identification of potential targets, the investor has not yet informed any candidate about the intent of acquisition. Therefore, the investor would not be able to obtain sufficient internal information directly from the candidates. In this case, the investor could retain a consulting/research institution to conduct a Market Due Diligence to collect external information for analysis purpose.

2.Initial Bidding

   Being forbidden to contact the target company during a bidding process, the tenders/investors do not have the access to the internal information of the target company. Under this circumstance, it is a feasible approach for the tenders/investors to start an external research on the target company by Market Due Diligence.

3.Hostile Takeover

   An investor who intends to acquire a target company through hostile takeover would avoid contacting the target company directly. Instead, the investor prefers to secretly develop negotiation strategies and M&A plans for confidentiality reasons. Meanwhile, the management of the target company would not allow the investor to launch a formal Due Diligence. In this case, the investor has to collect the information of the target company by Market Due Diligence.

4.Negotiating the conditions for Letter Of Intent (LOI)

   During the negotiate phase of an investment or an acquisition transaction, Signing LOI would determine the basic details like deal structure, initial offer price, terms of termination, and etc.. Regarding the potential risks that may exit in the transaction, the investor should take preventive measures in order to make correct decisions.

5.Being not allowed to conduct a research

   As the relevant parties do not share the same interest within an investment/acquisition, the management of the target company might be reluctant to cooperate with the investor or conceal the true status. In another scenario, a holding company might intend to investigate the operation status and competition landscape of its own subsidiaries via fair and independent approach. In these cases, retaining Huaran Consulting as an independent research/consulting institution to conduct Market Due Diligence might be rational choice.

Core contents of a Market Due Diligence Report

1.Macro Conditions Analysis

Political Factors: Judicial System, Taxation System, Governmental Interference, etc.

Economics Factors: Macroeconomics trends, Foreign Exchange Fluctuation, Employment, etc.

Social Factors: Public Awareness, Population Dynamics, Traditional Customs, etc.

Technical Factors: Technical Renovation, Patent Production, Technical Disparities, etc.

2.Market Status Analysis

Market Definition: Segmentation, Industry Chain

Market Scale: Production Volume, Sales Turnover, Import & Export.

Market Feature: Quality, Pricing, Distribution Channels, Diversity, Relevant Service, etc.

Future Trend: Drive Factors of Growth, Growth Space.

3.Competition Landscape Analysis

Players: Features and Advantages of the Major Players

Market Share: Market Share of the Top Ten Players

Threats: New Entrants and Substitute

4.Target Company Analysis

Company Background

Income Scale

Advantage and Disadvantage

Value Assessment

Development Trend