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Due diligence slides

  1. 1. Strictly Private & Confidential Discussion PaperDue Diligence Process M&A Strategic Advisory Division April 2009
  2. 2. Strictly Private & ConfidentialDisclaimer  The information and opinions in this document were prepared by Daiwa Securities Capital Markets Co. Ltd. (“Daiwa “) and/or its affiliates.  The information herein and the sources of the information are believed by Daiwa to be reliable, but Daiwa makes no representation and/or warranty as to the accuracy or completeness of such information.  Any use, disclosure, distribution, dissemination, copying, or reproduction of this document without prior written consent or approval from Daiwa is strictly prohibited. The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; accordingly, please treat this document as strictly for your company’s own use.
  3. 3. Strictly Private & ConfidentialProcess Flow for the Transaction Implementation of  Detailed due diligence of the Target by the Investor Due Diligence  Business plan, Management resources  Assets (including receivables etc)  Liabilities (debt covenants, contingent liabilities)  Key documents  Brands, intangible assets  Environmental issues etc Submission of Final  Seller will prepare a Process Letter to the Investor Proposal  In response to the Process Letter, the Investor will submit a final proposal based on the findings from the due diligence (including offer price etc)  Either the Seller or Investor will prepare the drafts of Share Purchase Agreement and/or Joint Venture Agreement. Negotiation of Share  The counterparty will provide the markup of the Agreements. Purchase Agreement and  Based on the markups, both parties will enter into a negotiation (eg price, key Joint Venture Agreement provisions such as conditions precedent, warranties, indemnification, closing conditions, governing law etc)  Board approvals Signing of the Agreements  Signing of Agreements  Prior to Closing, the Investor will verify that (1) the representations and warranties are Closing true and accurate; (2) conditions precedent and pre-closing obligations are fulfilled; (3) closing conditions are satisfied. The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 2 accordingly, please treat this document as strictly for your company’s own use.
  4. 4. Strictly Private & ConfidentialDue Diligence The due diligence in M&A is a process whereby investors/buyers and their advisors conduct a comprehensive investigation and analysis of their target companies, in aspects such as business, financial, legal, operation, technology and environment. Due  Business DD  Business DD  Tax DD Diligence  Financial DD  Environment DD  HR DD etc Tasks of the Investor Flow M&A (in general) Tasks of the Seller Kick-off Meeting Formulation of M&A Strategy Kick-off Meeting Determination of DD Scope Execution of confidentiality agreement Preparation of the Target Company Disclosure of preliminary info Analysis data-room info Preparation of Process Letter Q&A/ Additional info request Execution of LOI or MOU (instructions to the Investor) Interview/ Investigation and data-room Implementation of DD Reports from Set-up of data-room Legal Advisors/Auditors Valuation and Negotiation Preparation for interview Preparation of Agreement drafts Finalization of Proposal Signing of Definitive Agreements Replies to additional queries and requests Closing (Settlement and Transfer of shares) The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 3 accordingly, please treat this document as strictly for your company’s own use.
  5. 5. Strictly Private & ConfidentialDue Diligence, Valuation and Negotiation of Agreements  The DD process allows the Investor to assess the risks involved in the Transaction and understand the business of the Target for the valuation.  Negotiation of the pricing and the definitive agreements will be based on the DD. DD, Valuation and Negotiation Flow M&A (in general) Business Plan Info from DD The Seller discloses the Formulation of M&A Strategy business plan and  Business DD  Audit / Tax DD financial  Technology DD  Legal DD statements of the Execution of confidentiality agreement DD etc  Environment Target. Disclosure of preliminary info DD etc The Investor scrutinizes the Execution of LOI or MOU Revised business plan and Business Plan Normalized P/L, B/S normalizes the financials. Implementation of DD Valuation  DCF The Investor relies  Comparables on the revised Valuation and Negotiation  Net Tangible business plan and Assets normalized  Issues uncovered financials to Signing of Definitive Agreements during the DD to conduct valuation be reflected in the of Target. Valuation definitive Closing The Investor Negotiation agreements reflects the risks (Settlement and Transfer of shares) uncovered during the DD in the Negotiation of the DA definitive agreements for negotiation. The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 4 accordingly, please treat this document as strictly for your company’s own use.
  6. 6. Strictly Private & ConfidentialBusiness Due DiligenceBusiness Due Diligence  The Investor will investigate and analysis the Target, particularly in areas such as business model, market conditions, product characteristics and quality, customer base (distribution networks, bargaining power etc), competition, threats from substitutes and new entrants, production capabilities (technology, R&D strengths), past financials, future business plan etc. Based on these findings, the Investor will perform a SWOT analysis and assessment of the future profitability of the business.  Objectives of Business Due Diligence (i) Examine the feasibility of the business plan and perform valuation of the Target based on this business plan (ii) Formulate a revised business plan of the merged entity, taking into consideration the synergies arising from the M&A. Perform valuation of the Target based on the revised business plan.  External climate: Industry analysis (Five Forces Analysis)  Analysis of the Target and its management strategy, business model, internal capabilities (Analysis of value chain, SWOT etc)  Analysis of profitability (budgeted and actual, fixed and variable costs, working capital etc)  Business Due Diligence is closely associated with Financial Due Diligence. Financial Due Diligence allows the Investor to verify the past business of the Target, while Business Due Diligence helps the Investor to authenticate the Target’s future business plan (based on the Financial Due Diligence). The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 5 accordingly, please treat this document as strictly for your company’s own use.
  7. 7. Strictly Private & ConfidentialLegal Due DiligenceLegal Due Diligence  The Investor will investigate aspects associated with the legal risks involved in the Transaction.  Legal Due Diligence will involve the review of various documents and contracts. This will allow the Investor not only to ascertain the authenticity of the documents, but also assess the impact of long-term or unusual contracts on the business, or any contingent liabilities on the financials of the Target.  Legal risks and their impact on the Transaction will be assessed. The Investor will normally propose schemes or add provisions in the acquisition agreement to minimize or eliminate such risks.  Examples of legal firms with partners in Indonesia: Norton Rose, Baker & McKenzie, Milbank, Allen & Gledhill, Khattar Wong, Letham & Watkins  Impact on approvals and material contracts  It is important to ascertain the impact of the Transaction on approvals and material contracts. For example, a change of control will sometimes lead to cancellation of regulatory approvals and licenses and termination of contracts.  Impact on valuation of the Target  While Legal Due Diligence is not directly associated with the valuation of the Target, there are instances whereby adjustments are made to the valuation based on the Legal Due Diligence findings, e.g. the Target would be involved in a litigation and there is a strong likelihood that the Target would be liable for any damages. The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 6 accordingly, please treat this document as strictly for your company’s own use.
  8. 8. Strictly Private & Confidential Financial and Tax Due DiligenceFinancial and Tax Due Diligence  Verification of past financial performance and profitability of the Target  Assessment of current financial and cash position, which will form the basis for the Target’s future projections.  Analysis of Income Statement  Understanding the revenue and cost model associated to the operating performance of the Target’s business  Normalization of the earnings of the company  Analysis of Cash Flows  Analysis of EBITDA projections, working capital, monthly and annual cash flows, capital expenditure etc  Analysis of Business Plan  Assessment of the consistency and compatibility of the model (based on actual and projected performance)  Validation of the assumptions used in the model  Analysis of Balance Sheet  Assessment of the potential risk involved in the Transaction The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 7 accordingly, please treat this document as strictly for your company’s own use.
  9. 9. Strictly Private & Confidential Key Points1 Period for the DD 4 Scope for the DD  The period for the DD varies from companies to  The Investor would request for information in companies, but normally spans from 3 weeks to 2 connection to risks involved in the transaction (such months. as contingent liabilities etc). The Seller shall disclose sufficient and necessary information for the2 Venue for the DD (Data-room) transaction.  Physical data-room or Virtual data-room (“VDR”).  Scope for the DD will have to be considered together Examples of VDR providers: Bowne; Intralinks. with the period of the DD and budget constraints.  For many cross-border transactions (and for those 5 Coordination with the Investor on Data Request which potentially involve several bidders), virtual data-room is often used as it is more cost-effective  A system must be put in place to allow queries (such and efficient. as those related to business, financial, accounting, legal, environment, human resource) by the Investor3 Team Structure t o b e a n s we r e d in a co o r d i n a t e d m a n n e r.  It is recommended that the Seller engages a financial advisor, legal advisor and if necessary auditors, tax consultants etc for the team.  While international audit firms have their counterparts in Indonesia, we do not recommend to change auditors at this point as it will take time for newly appointed auditors to come up to speed The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 8 accordingly, please treat this document as strictly for your company’s own use.
  10. 10. Strictly Private & ConfidentialInformation Flow during Due Diligence The Financial Advisor should take up the role of the point of contact with the Investor in order to facilitate the flow of the information during the DD. A DD, if not properly executed, will result in bad faith between the parties and negatively impact the negotiation over pricing, terms and conditions. Investor Seller Timeline Investor Seller’s FA Queries/ Information Inflow Preparation Data request Receives list Queries/ Requests FA Data FA Request/ Decides Investor Interview where Request to channel Advisors the queries Formulation Advisors Information Outflow of responses Responses to Receives Formulation queries of reports Responses Seller Responses to Receives Formulation queries Other Advisors of reports Responses The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 9 accordingly, please treat this document as strictly for your company’s own use.
  11. 11. Strictly Private & ConfidentialVirtual Data Room Virtual Data Room (“VDR”) is an online platform which hosts the documents required for the due diligence for a period of time. It is designed such that only the staff designated by the Investor and its advisors are granted access to these documents. Some of the VDR service providers include Intralinks and Bowne. Normally, the Investor will inform the Seller the names, designation and the email addresses of the staff accessing the VDR. Once the Seller has registered these accounts, the Investor and its advisors would be given access to the VDR with login usernames and passwords. Some Features of the VDR The Seller can monitor the access trails of the Investor and its advisors. For sensitive documents, print (and print-screen) restrictions may be set. Every time new materials are uploaded, the Investors and its advisors would be notified. The Seller can also keep track of documents printed out or downloaded. The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 10 accordingly, please treat this document as strictly for your company’s own use.
  12. 12. Strictly Private & Confidential Q&A/Information Requests  The Investor would normally seek clarification or request for information in addition to that already disclosed in the VDR.  The Q&A correspondence may be done using a spreadsheet prepared by the Seller.  This spreadsheet will have columns for the Seller’s responses. Illustration of the Q&A spreadsheetProject Q&A List as of 2009/05/01 Confidential Questions by No. Category New? Date of Question Priority Reference Question Date of ResponseResponded by Response Check Remarks Company Name 1 2 3 4 5 6 7 8 9 10 11 Questions by the Responses by Investor the Seller Note:  In addition to the Q&A list above, the Seller may also provide the responses to the Investor over interviews or Q&A sessions etc. The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 11 accordingly, please treat this document as strictly for your company’s own use.
  13. 13. Strictly Private & ConfidentialSome Rules for Due Diligence Due Diligence Period  Period for the Data Room  Deadline for questions and information request by the Investor Q&A/Information Request  Timing for submission of questions and information request (e.g. 17:00 every Tuesday and Friday during the due diligence period)  Timing for submission of responses (e.g. 17:00 every Monday and Thursday during the due diligence period)  The Investor must collate all questions (whether legal, financial or others) in the spreadsheet and send to the Seller for each submission  The Investor must organize the questions such that there are no duplicated questions Q&A Sessions  The Q&A sessions must be appropriately represented e.g. CEO for business sessions, legal counsel for legal and regulatory sessions, CFO for accounting sessions.  Ground rules for decision of the Q&A sessions and the dates Site Visits  Normally local staff are not notified of the Transaction. For confidentiality reasons, the site visits are positioned as audit sessions by clients etc.  Conversations with local staff should be restricted, and no name cards should be exchanged.  The attire for the site visits and the logistics etc. The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc. All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent; 12 accordingly, please treat this document as strictly for your company’s own use.
  14. 14. Data room rules1. A’s due diligence of B is subject to the Rules of the Data room below. ■ TBC2. Familiarity with Rules of the Data room - A is to ensure all its staff and advisors (“A parties”) are familiar with the rules below prior to commencement of the due diligence.3. Opening Hours: Strictly 8am – 5pm from xx to xx xx 20114. Venue: [ ]5. Permitted Persons – A list of A parties that will be accessing the Data room, with company name, corporate title and contact telephone numbers, is to be provided by A to B through D two business days before commencement of the due diligence. Any change to the list of permitted persons must be informed by writing two business days beforehand. B reserves the right to decide if any change is allowed.6. Signoff on Data room files provided - A is required to sign off that they have received all the files as listed in the Data room index which will be provided at the start of the Due diligence.7. Signing in/Signing out - A parties are to sign in their particulars and time of entry on the Registry maintained by K staff and to sign out their time of exit daily.8. Designated Name tags of permitted persons are to be worn at all times while in the data room, and to be returned to K staff upon leaving the data room. Non-removal of Data room materials - A is to procure that no materials in the data room are to be removed by A parties at any time as these are strictly confidential and belong to the property of B.9. No copying or printing of any of the materials is allowed.10. Electronic access - Internet access and landline access would only be provided on an available basis.11. Decorum – A parties are to be suitably dressed in office attire and to maintain good behaviour as guests of B.12. Smoking – No smoking is allowed in the data room. A parties may smoke in the designated smoking area only. This document has been prepared by Daiwa Securities SMBC Singapore Limited. (“Daiwa SMBC”) based on information, the sources of which are believed by Daiwa SMBC to 13 be reliable, but Daiwa SMBC makes no representation nor warranty as to the accuracy or completeness of such information. Recipients of this document must make their own decisions on whether or not to adopt the recommendations discussed in this document, based upon their specific situations and objectives. Any use, disclosure, distribution, dissemination, copying, or reproduction of this document without prior written consent from Daiwa SMBC is prohibited.
  15. 15. Data room rules (cont’d)13. Quiet – A parties are to be maintain quietness at all times. Where there is a need for verbal communication, this is to be kept at a minimum and at low volumes, to avoid disturbance to surrounding area and to avoid ■ disclosure of information and activities performed in the data room. any TBC14. Non-Communication to B staff - A parties are to abide by the sensitivity of the transaction and are not permitted to question, or talk to, or request information from K staff in the building or outside the data room at any time except to the persons appointed by K Management to communicate with A in the operation of the Due diligence.15. No chatting is permitted outside the data room among A parties.16. Non-Disclosure to outside parties - A parties are strictly not permitted to disclose any information from the data room to outsiders. All A parties accept and acknowledge that they are bound by the Non-disclosure agreement signed by A with B dated [ ].17. All queries/request for information by A to B are to be submitted on prescribed form which are available in the dataroom (Form 1). As B Management are busy running the day-to-day operations of the company, A is to vet through any requests/queries by B parties before submitting them to B. A is to determine among other factors, the relevance, materiality and usefulness of the information being requested and to avoid submitting duplicate or similar questions to B18. K is not obligated to answer any or all of the queries/request for information by A parties and will answer them as it deems fit.19. A’s requests on prescribed Form 1 are to be handed to B staff appointed to collect the forms at 12pm, and at the end of the day.20. All information provided by B to A parties remain the property of B, and are to be surrendered to B upon demand.21. A is to ensure A parties abide by all the Rules above. Non-compliance by A parties to any of the Rules above can seriously jeopardize B’s position. Consequently, B reserve the right to seek damages, redress and remedial actions including baring any or all A parties from further entry into the data room, cancelling the due diligence, cancelling the transaction, litigation and any legal or other recourse under its disposal. This document has been prepared by Daiwa Securities SMBC Singapore Limited. (“Daiwa SMBC”) based on information, the sources of which are believed by Daiwa SMBC to 14 be reliable, but Daiwa SMBC makes no representation nor warranty as to the accuracy or completeness of such information. Recipients of this document must make their own decisions on whether or not to adopt the recommendations discussed in this document, based upon their specific situations and objectives. Any use, disclosure, distribution, dissemination, copying, or reproduction of this document without prior written consent from Daiwa SMBC is prohibited.

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