Duediligence 130522013210-phpapp02
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Duediligence 130522013210-phpapp02 Presentation Transcript

  • 1. Chapter 4 Due Diligence © Oxford University Press 2011. All rights reserved.
  • 2. What is Due Diligence?  Implies an activity involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care  Also used to mean a required legal obligation although the term more commonly applies to a voluntary investigation  Examples:  Steps carried out by venture capitalists before and during each investment phase of a start-up company  Precautionary steps taken by one company in deciding whether to acquire another i.e. evaluating whether the buy is good or bad. © Oxford University Press 2011. All rights reserved.
  • 3. What is Due Diligence?  Banking Industry - To act in a prudent manner in evaluating credit applications.  Securities Market - Responsibility of underwriters to explain the details of new securities to interested purchasers.  Legal Definition - “A measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depends on the relative facts of the special case." © Oxford University Press 2011. All rights reserved.
  • 4. Activities of Due Diligence  Financial Statements:   Management and Operations review:   Determine quality and reliability of financial statements to gain a sense of contingencies beyond the financial statements. Legal Compliance Review:   Review and confirm the existence of assets, liabilities, and equity in the balance sheet to determine the financial health of the company based on the income statement. Check the potential future legal problems stemming from the target's past. Document and Transaction review :  Ensure paperwork of the deal is in order and that the structure of the transaction is appropriate. © Oxford University Press 2011. All rights reserved.
  • 5. Need for Due Diligence  Strengths and weaknesses of the business  Gives a fair value of the investment  Helps in identifying the apparent irregularities  Tool of ensuring that the prevailing system of checks works © Oxford University Press 2011. All rights reserved.
  • 6. What does Due diligence involve?         Historical Financial Data Current Financial Data Forecasted Financial Information Business Plans Minutes’ of Directors’ Meetings and Management Meetings Audit Paper Work Files Contracts with Suppliers, Customers and Staff Confirmation/ Representations from Financiers, Debtors, etc. © Oxford University Press 2011. All rights reserved.
  • 7. Transactions requiring Due Diligence  Mergers and Acquisitions:   Personnel Financial Operations  Marketing  Property and Equipments  Business Operations  Strategic Alliances and partnerships  Joint Ventures and Collaborations © Oxford University Press 2011. All rights reserved.
  • 8. People Involved in Due Diligence  Financial  Legal  Operational © Oxford University Press 2011. All rights reserved.
  • 9. Parties interested in Due Diligence  Employees  Trade Unions  Shareholders  Creditors  Vendors  Customers  Government  Society © Oxford University Press 2011. All rights reserved.
  • 10. Steps in Due Diligence Process © Oxford University Press 2011. All rights reserved.
  • 11.   Due Diligence Reporting  Should reflect a fair and independent analysis & evaluation of financial and commercial information  Should ensure collection, analysis and interpretation of financial, commercial and tax information in detail  Should provide properly reviewed and analyzed financial information to bidders and various stakeholders  Should also provide a feedback on auditing of the © Oxford University Press special purpose accounts. 2011. All rights reserved.
  • 12. Types of Due Diligence Financial Due Diligence:  involves evaluating a company’s historical, current, and prospective operating results as disclosed in its historical, current and projected financial statements, tax returns, and other information  Involves analysis of balance sheet, review from cash to marketable securities, receivables, inventory, prepaid expenses and other current assets, as well © Oxford University Press 2011. as the value of fixed assets. All rights reserved.
  • 13.  Analysis on the liability side includes accounts payable, taxes, and debt obligations must be closely examined  Helps in getting a sense of future revenues  Evaluates the underlying assumptions used © Oxford University Press 2011. All rights reserved.
  • 14. Legal Due Diligence:  Scrutiny of all, or specific parts, of the legal affairs of the target company with a view of uncovering any legal risks and provide the buyer with an extensive insight into the company’s legal matters  Improves the buyer’s bargaining position and ensures that necessary precautions in relation to the transaction are taken © Oxford University Press 2011. All rights reserved.
  • 15. Objectives of Legal Due Diligence      Gathering of information from the target company, Uncovering of the target company’s strong and weak sides, relevant risks and advantages in connection with the transaction, Minimizing the risk of unexpected situations, Improvement of the seller’s bargaining position, Identification of areas where representations and warranties from the seller should be obtained in the acquisition agreement. © Oxford University Press 2011. All rights reserved.
  • 16. Documents verified            Confidentiality and invention assignment agreements with employees Tax and financial documents Legal disputes and other kinds of conflicts Marketing practices regulation National and EU-competition law Public procurement law. IT law and IT contracts Intellectual property rights  Patents, copyrights, and  other intellectual propertyrelated documents  Company law Financing  Employment law Data protection law  Consumer protection law General contract law Minutes and consents of the board of directors and © Oxford University Press 2011. All rights reserved. shareholders
  • 17. Operational Due Diligence:  Involves the on-site analyses of the target business daily processes and of how the business operates.  Analysis includes an evaluation of the key employees, managers, independent contractors, suppliers and other factors necessary for the business to conduct normal operations  May also cover investigation outside of the actual business. © Oxford University Press 2011. All rights reserved.
  • 18.    Includes examining work centres, material flow, scrap generation, and inventory levels to identify improvements required to improve productivity and profitability Helps identify and implement changes necessary to increase EBITDA and increasing the multiples due to lower risk. Involves gathering information on:      New product or service creation Markets Competition Sales Targets © Oxford University Press 2011. People/Organizational matters All rights reserved.
  • 19. Intellectual Property Due Diligence  Through analysis needed in this area as economies are increasingly becoming technology driven  process of identifying all intellectual property assets, verifying ownership and ensuring that such assets are free of encumbrances for the intended business use is fundamental to any merger, acquisition or investment © Oxford University Press 2011. All rights reserved.
  • 20.  Examples range from the ingredients and manufacturing process for coke, a closely guarded trade secret, to the many domestic and international trademarks owned by multinational conglomerates such as Tata, HUL, Reliance, etc. © Oxford University Press 2011. All rights reserved.
  • 21. IT Due Diligence;  Involves scrutiny of IT systems and processes in use and ascertaining better ways of deriving value and leverage from IT assets  Involves:     Sending an IT request list to the acquired company Compiling an onsite discovery process outline Conducting a review of the requested materials Scheduling and coordinating the onsite visit © Oxford University Press 2011. All rights reserved.
  • 22. Human Resource Due Diligence:   Involves valuing the contribution of HR Helps by:  Establishing a link between organizational objectives and the HR function  Determining HR's influence on the skills and motivation of the workforce  Determining the managers views of the HR function  Ascertaining the outcomes produced by the HR deliverables  Measuring the adequacy of HR measures, metrics and benchmarks  Ascertaining the total cost of the HR function and industry comparisons  Ascertaining the HR team structure, skills and motivation. © Oxford University Press 2011. All rights reserved.
  • 23. Areas covered           Organizational culture Executive compensation and “golden parachute” contracts Collective bargaining agreements and potential change of ownership liabilities Defined benefit and contribution pension plans Postretirement benefits Retention and severance plans Health and welfare insurance structure and reserves HR functional structure and service delivery HR Information System (HRIS) and © Oxford University Press 2011. All rights reserved. Employment Litigation
  • 24. Litigation Analysis When one company sells or otherwise transfers all its assets to another company, the successor is not liable for the debts and tort liabilities of the predecessor.  Successor may be liable, however, under the following circumstances:  If it has expressly or implicitly agreed to assume liability  If the transaction is a merger or consolidation  If the successor is a “mere continuation” of the predecessor  If the transaction was fraudulently designed to escape liability. © Oxford University Press 2011. All rights reserved.
  • 25. Components of Litigation Analysis Customers -- as well as competitors, suppliers, and other contractors—might sue over:  contract disputes  cost/quality/safety of product or service  debt collection, including foreclosure  deceptive trade practices  dishonesty/fraud  extension/refusal of credit  lender liability  other customer/client issues  restraint of © Oxford University Press 2011. All rights reserved. trade
  • 26. Employees -- including current, past, or prospective employees or unions—might sue over:  breach of employment contract  defamation  discrimination  employment conditions  harassment/humiliation  pension, welfare, or other employee benefits  wrongful termination © Oxford University Press 2011. All rights reserved.
  • 27. Regulators might sue over:  antitrust (in suits brought by government)  environmental law  health and safety law © Oxford University Press 2011. All rights reserved.
  • 28. Shareholders might sue over: Contract disputes (with shareholders) Financial transactions (such as derivatives) Investment or loan decisions Divestitures or spin-offs Fraudulent conveyance M&A scenarios (target, bidder) Dividend declaration or Change duties to minority shareholders General breach of fiduciary duty Proxy contents Executive compensation Inadequate disclosure (such as golden parachutes) Recapitalization Financial performance/ bankruptcy Share repurchase Insider trading © Oxford University Press 2011. All rights reserved.offerings Stock
  • 29. Suppliers might sue over:  antitrust (in suits brought by suppliers)  business interference  contract disputes  copyright/patent infringement  deceptive trade practices   © Oxford University Press 2011. All rights reserved.
  • 30. Does Due Diligence insure against M & A failure?  Helps avoid:  Able to avoid unnecessary losses and expenses  The organization’s governing body is able to demonstrate that it has engaged in effective oversight and  Senior officers of the company avoid job- and bonusthreatening adverse events © Oxford University Press 2011. All rights reserved.
  • 31. Due Diligence involving Financial Issues     Can lead to significant unbudgeted liabilities and the diversion of time and energy of key executives Helps identify fictitious bills and fictitious originals created such as the signature-authority list. Helps identify dormant bank accounts for they are a breeding ground for manipulative practices. Unexpected voiding of invoices from the organization’s accounts receivable system should be investigated, particularly if your organization is structured so that people who have the ability to void an invoice also have the ability to receive or issue cheques © Oxford University Press 2011. All rights reserved.
  • 32. Due Diligence Involving Organizational Records  Periodic review of the minutes of board meetings needs to be done.  Record retention policies are often advocated across countries as a reliable tool of reference. © Oxford University Press 2011. All rights reserved.
  • 33. Due Diligence involving Legal Compliance  Helps ensure that the organization is in compliance with applicable law  Depending on the nature and size of an organization’, professional advisors should be engaged to evaluate the laws and regulations as applicable, and to help management design a due diligence plan  Compliance can be achieved in an orderly, costeffective and timely manner © Oxford University Press 2011. All rights reserved.
  • 34. Due Diligence involving Interaction of Contracts  Involves due diligence of key contracts and agreements, and summarizing and crossreferencing  Critical for future reference  Help in avoiding inadvertent conflicts. © Oxford University Press 2011. All rights reserved.
  • 35. Due Diligence involving Information Systems  Helps to get tuned to the rapid shift from manual system infrastructure to technology driven infrastructure.  Ensures adherence to regulatory compliance that are coming into force. © Oxford University Press 2011. All rights reserved.
  • 36. Due Diligence involving Key Customers and Suppliers  Strong need to initiate ongoing monitoring of the operations and plans of key customers and suppliers as can reveal important information on its current financial and operational status and nearterm future events.  Also reveal a deteriorating financial condition in advance. © Oxford University Press 2011. All rights reserved.
  • 37. Effective Due Diligence team      Have members with first hand experience in the industry to which the target belongs Have members with expertise in different areas such as HR specialists, Functional area managers, individuals with knowledge of national culture, etc. Capable of quickly identifying both the positive and negative aspects of the property to be acquired.   Willing to carry out a site visit to evaluate the current condition of the assets to be acquired; both the physical assets as well as the personnel Have members who possess excellent negotiation skills Have people who have time to lead the project and serve as team members University Press 2011. All rights reserved. © Oxford
  • 38.       Ensure that the diligence team is co-located within a secure environment, such as a corporate headquarters or closer to the target Be familiar with the strategic and financial rationale behind the acquisition Train the team to identify and home in on specific issues Develop and communicate rules of engagement between the diligence team and the target company Make available analytical tools and techniques so the team can rapidly get its arms around potential synergies and integration challenges Healthy flow of information © Oxford University Press 2011. All rights reserved.
  • 39. Why Due Diligence fails?  Failure to Focus on Key Issues  Failure to Identify New Opportunities and Risks  Failure to Allocate Adequate/ Right Resources © Oxford University Press 2011. All rights reserved.
  • 40. Thank you! © Oxford University Press 2011. All rights reserved.