Knowing what you're inheriting: due diligence reshapes the price of a share acquisition

An international technology group planning to acquire a Malaysian semiconductor testing services provider needed to know what would come with the company. KTP's due diligence identified unresolved related party balances, a former shareholder balance that had not been confirmed as legally settled, and a tax-loss position that had not been verified. After the due diligence, the deal was restructured so that part of the price was deferred and made contingent, and the acquisition was completed

The result

After the due diligence, the purchase consideration was restructured. A fixed base amount was paid at completion, and a further portion was deferred as a contingent earn-out rather than paid upfront. The buyer completed the acquisition knowing which balances would transfer with the company, which had genuinely been resolved and which still carried risk.

At a glance

Client: An international technology group

Transaction: Acquisition of the entire share capital of a Malaysian provider of specialised electronics and semiconductor testing services

Service: Financial due diligence

Decision supported: Whether to proceed, and on what consideration terms

The challenge

The target had several years of trading history, funding arrangements with its shareholder group, and a tax position built up over years of losses. None of this could be fully understood from the headline financial statements. The target had also changed hands before, which left balances from its previous ownership still on the books.

Before committing to a price, the buyer needed to know which balances would transfer with the company, which were genuinely settled, and which carried real risk if left unaddressed.

Our approach

KTP reviewed the target's financial statements, trial balance and general ledger alongside supporting schedules, confirmations and transaction documents, and traced material balances to their supporting evidence. Every unresolved matter was carried through to a suggested treatment, so the buyer could weigh it directly in the negotiation.

What we found

Related party balances. Loans and advances between the target and its shareholder group would stay with the company after a share acquisition. Some sales were also made to a related company. These arrangements had to be understood on their own terms, not assumed to continue after the change in ownership.

A former shareholder balance not confirmed as settled. The vendor proposed to waive a significant balance owed to a former shareholder, but its legal settlement had not been independently confirmed. Until it was, a buyer of the shares could not treat the balance as gone.

A tax-loss position that had not been verified. The target's unabsorbed tax losses and capital allowances came from tax computations submitted with its own returns. LHDN had not yet examined them, so their value to a buyer depended on the returns standing up to a future audit, and on the losses being used before their carry-forward period expired.

A transfer pricing documentation gap. Related party dealings were not supported by transfer pricing documentation, which left the company open to questions and penalties on those transactions.

KTP's View

A due diligence report is only useful if its findings change the deal. Here, spelling out what was still unresolved, rather than assuming it away, changed how the price was paid. In a share acquisition, the buyer inherits the company's history as well as its assets, and the time to price that history is before completion.