Description
The objectives PPT is about due diligence and explains its role in merger and acquisitions. It also explains different types of due diligence.
DUE DILIGENCE
In search of risk
M & A overview
Strategic Planning
Candidate Scouting
Confidential Courting
Due Diligence
Negotiations Price / Term
Integration
2
Due Diligence
Jan-13
Due diligence
?
Process of identifying potential liabilities and risks in M&A
?
Systematic, structured research effort to ascertain and accumulate facts necessary to make an informed investment “decision” The areas a diligence may “help” are:
? ? ? ?
?
To make or not to make the proposed acquisition / Assess acceptability of liability and risk How much to pay How to structure the deal / Apportioning liabilities among the parties involved in the deal Post acquisition issues - relating to the operations, accounting, legal etc
Due Diligence Jan-13
Source : NIRC Seminar or M&A, 2006
3
Objectives of due diligence
Source : Hewitt Associates Report – M&A in Asia Pacific, 2007
4
Due Diligence
Jan-13
Types of due diligence reviews – Functional
IT Ops & IT HR Legal Tax Financials
Source : NIRC Seminar or M&A, 2006
Page 5
27 January 2013
Types of due diligence reviews – Functional
Human Resources
?
Operational and IT
?
Market
?
Validation of payroll cost
Assessment of
Validating the market existence, size, potential
operational assumptions
?
?
Pension and employee liability valuation
Understanding operational systems
?
Assessing Target’s presence - market share, attractiveness, competitive position
?
Employment
?
IT management and organization
?
termination costs
?
Compensation and benefit alignment costs
? ? ?
IT integration Transition Planning Review of historical recruitment and staff turnover
Assessing future returns whether the sales forecasts are achievable
?
Review of historical recruitment and staff turnover
?
Issues likely to impact the target’s projections
Page 6
27 January 2013
Types of due diligence reviews – Buy v/s Sell
Buy Side Diligence
(Are you buying what you think you are buying)
v/s
Sell Side Diligence
(Do you know the issues buyers may negotiate on)
Page 7
27 January 2013
Due diligence reviews – Buy side
?
Financial analysis to support opinions and conclusions Identification of hidden value in the target Highlighting post-acquisition / integration / separation issues
?
?
?
Using expert resources in the target country to identify local risks and issues
Identifying areas that may impact the exit strategy of the equity provider Analysing the sustainability of earnings and cash flows
Page 8 27 January 2013
?
?
Due diligence reviews – Sell side
?
Assists the vendor by providing an upfront independent review Highlights sale and purchase agreement issues early that may become negotiating points or areas for warranties/indemnities Ensures a level playing field by providing all potential purchasers with objective information Reduces the level of due diligence procedures that potential purchasers need to perform
?
?
?
?
Expedites the deal timetable by avoiding lengthy negotiations and disruption to the vendor
Reduces the risk of last minute value erosion and avoid lengthy renegotiations
Page 9 27 January 2013
?
Types of due diligence reviews – Access levels
?
Full Access
?
Full access to the target management, staff, accounting, financial and legal data
?
Limited Access
?
Limited access to the target management, staff, accounting, financial and legal data
?
No Access
?
Strictly controlled environment, typically based on publicly available data
?
Carve Out
?
Strictly limited to the part of business proposed to be sold
Page 10
27 January 2013
Focus of the exercise – Determined by the Deal
Private Equity
? ?
Asset Acquisition
?
Seller does not sell controlling stake (<25%) Seller aims at obtaining funds for expansion / operations
Slump sale / Asset Sale
?
Acquisition of part of Assets and
Liabilities (The balance is retained by sellers)
?
Buyer aims at obtaining return on investment
Strategic
? ?
Equity Acquisition
?
Seller typically sells controlling stake (> 25%) Buyers and sellers aim at integration of synergies, and resources
Acquisition through equity acquisition (change of ownership)
?
No Slump sale / Asset sale
Page 11
27 January 2013
Financial due diligence – Focuses on….
?
Compliance with GAAP Review of Shareholders Agreement, share holding pattern and liens on shares Nature of Reserves - restrictions on utilization Loans / Borrowing facilities – terms & conditions and restrictive covenants Cash flow reviews – monthly / annual to identify seasonality in business
?
?
?
?
Page 12
27 January 2013
Financial due diligence – Focuses on….
?
Details of Assets / Liabilities and their recoverability / impairment
? ? ?
Fixed Assets (including leased assets and IPR’s) – Title and any encumbrances Inventories Receivables (including Credit Policy/ Collection Period) and other Assets
?
Liabilities (including Retirement benefits and other employee liabilities)
?
Trading Results – segment wise and identification of Extraordinary/ exceptional items, if any
Page 13
27 January 2013
Financial due diligence – Focuses on….
? ?
Gross Margins and EBITDA analysis Impact of Discontinued operations Group company transactions and dependence – this would highlight Separation / Stand Alone Issues Specific regulation for business / industry Review of Internal Control and MIS systems Management & Employees and their Relationship
?
?
?
?
Page 14
27 January 2013
Tax due diligence – Focuses on….
?
Status of Direct and Indirect tax assessments Review of audits carried out by the respective tax authorities Review of the claims made by the tax authorities and the responses made
?
?
Page 15
27 January 2013
Result of the due diligence
Quality of Assets Quality of Earnings & Cash Flows Potential Liabilities & Commitments
Separation / Structuring / Integration Issues
Tax and Other Regulatory Issues
Other stand alone issues
Co-ordination with other advisors and issues identified by them Industry and market issues
Page 16 27 January 2013
Result of the due diligence
?
Identification of “deal breakers” Adjustment to “pre-diligence” valuation Negotiation support
?
?
?
Conditions in Share Purchase Agreement (SPA)
Representations and warranties
?
?
Inputs for post deal action points
Page 17
27 January 2013
Timeline
First Proposal
Deal Contact Signed
Narrow focus Strategic & Financial
Broad Focus Advisors & Negotiations
Closing
LOI
Public Data
Private Data
Target private documents Support negotiations
Documentations Consultants’ report Preparation for integration
18
Due Diligence
Jan-13
Management of the due diligence
? ?
?
? ? ? ?
Quality of the Management Resources Quality of the Team Completeness of the Management Team Adult Supervision Diversity and Efficacy Past Successes Commitment
19
Due Diligence
Jan-13
Team for the due diligence – Characteristics
? ? ? ? ? ?
?
? ? ?
?
?
Quality People Integrity Intellectual Honesty Intellectual Brilliance People Smarts Real entrepreneurs Driven Intensity Bold Self-Confidence Vision & Ability Execute Ability to Solve Problems Adaptability Uses Resources well
20
Due Diligence
Jan-13
Lastly..
? ? ? ? ? ?
?
Think like an investor, not like a compliance officer It is part of the buyer’s risk management tool set Risk and Return Narrow versus Broad scope due diligence “Surprises now” versus “Surprises later” Be fact based but knowledge-oriented Documentation
21
Due Diligence
Jan-13
doc_264024749.ppt
The objectives PPT is about due diligence and explains its role in merger and acquisitions. It also explains different types of due diligence.
DUE DILIGENCE
In search of risk
M & A overview
Strategic Planning
Candidate Scouting
Confidential Courting
Due Diligence
Negotiations Price / Term
Integration
2
Due Diligence
Jan-13
Due diligence
?
Process of identifying potential liabilities and risks in M&A
?
Systematic, structured research effort to ascertain and accumulate facts necessary to make an informed investment “decision” The areas a diligence may “help” are:
? ? ? ?
?
To make or not to make the proposed acquisition / Assess acceptability of liability and risk How much to pay How to structure the deal / Apportioning liabilities among the parties involved in the deal Post acquisition issues - relating to the operations, accounting, legal etc
Due Diligence Jan-13
Source : NIRC Seminar or M&A, 2006
3
Objectives of due diligence
Source : Hewitt Associates Report – M&A in Asia Pacific, 2007
4
Due Diligence
Jan-13
Types of due diligence reviews – Functional
IT Ops & IT HR Legal Tax Financials
Source : NIRC Seminar or M&A, 2006
Page 5
27 January 2013
Types of due diligence reviews – Functional
Human Resources
?
Operational and IT
?
Market
?
Validation of payroll cost
Assessment of
Validating the market existence, size, potential
operational assumptions
?
?
Pension and employee liability valuation
Understanding operational systems
?
Assessing Target’s presence - market share, attractiveness, competitive position
?
Employment
?
IT management and organization
?
termination costs
?
Compensation and benefit alignment costs
? ? ?
IT integration Transition Planning Review of historical recruitment and staff turnover
Assessing future returns whether the sales forecasts are achievable
?
Review of historical recruitment and staff turnover
?
Issues likely to impact the target’s projections
Page 6
27 January 2013
Types of due diligence reviews – Buy v/s Sell
Buy Side Diligence
(Are you buying what you think you are buying)
v/s
Sell Side Diligence
(Do you know the issues buyers may negotiate on)
Page 7
27 January 2013
Due diligence reviews – Buy side
?
Financial analysis to support opinions and conclusions Identification of hidden value in the target Highlighting post-acquisition / integration / separation issues
?
?
?
Using expert resources in the target country to identify local risks and issues
Identifying areas that may impact the exit strategy of the equity provider Analysing the sustainability of earnings and cash flows
Page 8 27 January 2013
?
?
Due diligence reviews – Sell side
?
Assists the vendor by providing an upfront independent review Highlights sale and purchase agreement issues early that may become negotiating points or areas for warranties/indemnities Ensures a level playing field by providing all potential purchasers with objective information Reduces the level of due diligence procedures that potential purchasers need to perform
?
?
?
?
Expedites the deal timetable by avoiding lengthy negotiations and disruption to the vendor
Reduces the risk of last minute value erosion and avoid lengthy renegotiations
Page 9 27 January 2013
?
Types of due diligence reviews – Access levels
?
Full Access
?
Full access to the target management, staff, accounting, financial and legal data
?
Limited Access
?
Limited access to the target management, staff, accounting, financial and legal data
?
No Access
?
Strictly controlled environment, typically based on publicly available data
?
Carve Out
?
Strictly limited to the part of business proposed to be sold
Page 10
27 January 2013
Focus of the exercise – Determined by the Deal
Private Equity
? ?
Asset Acquisition
?
Seller does not sell controlling stake (<25%) Seller aims at obtaining funds for expansion / operations
Slump sale / Asset Sale
?
Acquisition of part of Assets and
Liabilities (The balance is retained by sellers)
?
Buyer aims at obtaining return on investment
Strategic
? ?
Equity Acquisition
?
Seller typically sells controlling stake (> 25%) Buyers and sellers aim at integration of synergies, and resources
Acquisition through equity acquisition (change of ownership)
?
No Slump sale / Asset sale
Page 11
27 January 2013
Financial due diligence – Focuses on….
?
Compliance with GAAP Review of Shareholders Agreement, share holding pattern and liens on shares Nature of Reserves - restrictions on utilization Loans / Borrowing facilities – terms & conditions and restrictive covenants Cash flow reviews – monthly / annual to identify seasonality in business
?
?
?
?
Page 12
27 January 2013
Financial due diligence – Focuses on….
?
Details of Assets / Liabilities and their recoverability / impairment
? ? ?
Fixed Assets (including leased assets and IPR’s) – Title and any encumbrances Inventories Receivables (including Credit Policy/ Collection Period) and other Assets
?
Liabilities (including Retirement benefits and other employee liabilities)
?
Trading Results – segment wise and identification of Extraordinary/ exceptional items, if any
Page 13
27 January 2013
Financial due diligence – Focuses on….
? ?
Gross Margins and EBITDA analysis Impact of Discontinued operations Group company transactions and dependence – this would highlight Separation / Stand Alone Issues Specific regulation for business / industry Review of Internal Control and MIS systems Management & Employees and their Relationship
?
?
?
?
Page 14
27 January 2013
Tax due diligence – Focuses on….
?
Status of Direct and Indirect tax assessments Review of audits carried out by the respective tax authorities Review of the claims made by the tax authorities and the responses made
?
?
Page 15
27 January 2013
Result of the due diligence
Quality of Assets Quality of Earnings & Cash Flows Potential Liabilities & Commitments
Separation / Structuring / Integration Issues
Tax and Other Regulatory Issues
Other stand alone issues
Co-ordination with other advisors and issues identified by them Industry and market issues
Page 16 27 January 2013
Result of the due diligence
?
Identification of “deal breakers” Adjustment to “pre-diligence” valuation Negotiation support
?
?
?
Conditions in Share Purchase Agreement (SPA)
Representations and warranties
?
?
Inputs for post deal action points
Page 17
27 January 2013
Timeline
First Proposal
Deal Contact Signed
Narrow focus Strategic & Financial
Broad Focus Advisors & Negotiations
Closing
LOI
Public Data
Private Data
Target private documents Support negotiations
Documentations Consultants’ report Preparation for integration
18
Due Diligence
Jan-13
Management of the due diligence
? ?
?
? ? ? ?
Quality of the Management Resources Quality of the Team Completeness of the Management Team Adult Supervision Diversity and Efficacy Past Successes Commitment
19
Due Diligence
Jan-13
Team for the due diligence – Characteristics
? ? ? ? ? ?
?
? ? ?
?
?
Quality People Integrity Intellectual Honesty Intellectual Brilliance People Smarts Real entrepreneurs Driven Intensity Bold Self-Confidence Vision & Ability Execute Ability to Solve Problems Adaptability Uses Resources well
20
Due Diligence
Jan-13
Lastly..
? ? ? ? ? ?
?
Think like an investor, not like a compliance officer It is part of the buyer’s risk management tool set Risk and Return Narrow versus Broad scope due diligence “Surprises now” versus “Surprises later” Be fact based but knowledge-oriented Documentation
21
Due Diligence
Jan-13
doc_264024749.ppt