Facts:

You are advising a European private equity firm ("Buyer") on a proposed acquisition of a Hong Kong-based electronics manufacturing company ("Target"). The Target is privately owned and operates in the consumer electronics sector, with a growing presence in Europe and Asia. The Buyer sees this transaction as an opportunity to expand its portfolio and strengthen its foothold in the Asian market.

As part of the due diligence process, the Target has provided the audited financial statements for the past three years, a summary of its debt and financing arrangements, and a schedule of intragroup transactions conducted over the past two years. Additionally, the Target disclosed a corporate guarantee agreement issued to another company within its parent group.

Upon reviewing the materials, you note that the Target changed its auditor last year. The previous auditor was a reputable international firm with extensive experience in the electronics sector, but the new auditor is a smaller, local firm. The financial statements provided by the Target do not disclose any contingent liabilities or material risks, and the Target’s management insists the company is in a strong financial position.

The corporate guarantee agreement indicates that the Target has guaranteed the debts of another company in its parent group, but the Target has not provided further documentation about the related party’s financial health. Additionally, the schedule of intragroup transactions shows that key assets were transferred to other entities in the parent group over the last year; however, no supporting documents or explanations regarding the valuation of these assets have been provided.

Your role is to assess the provided information and identify any potential risks or red flags that could impact the Buyer’s decision to proceed with the acquisition.

Question:

Based on your review of the materials provided, identify the issues or concerns that may arise in this transaction. Explain why these issues could be significant and what steps you would take to address them.