tm 1- m&a - corporate due diligence
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TM 1- M&a - Corporate Due DiligencTRANSCRIPT
Due Dilligence
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Corporate Due Diligence for Business Combinations
FT MBA - Trim VI Teaching MaterialMergers & Acquisition Dr. Paritosh BasuAcknowledgement
The author acknowledges that freely available graphics through internet have been used for this presentation with the objective of propagating knowledge3Corporate Due Diligence - Business Combinations
Operational and Financial Due Diligence
Large Deals and Transactions
Merger - Entities, Business Groups
Acquisition Entity, Division, Business Group, CGU, Set of Assets
Demerger
Investment IPO, Equity, Quasi Equity, Long Term Debt
Repetitive large transactions Precursor to a prospective Deal
Long Term Procurement / Supply Arrangement
Anciliarisation
Wet-LeasingOther Due Diligence Services
Technological
Human Resource
Supply Chain / Logistics
Legal
Strategic Alliance
CommercialDue Diligence is a counter-weight to the excitement when managers begin to pursue a target
4Big Questions ??What synergies do we see with the target?Do we know what are we buying?What is the right time to close the deal?Is there any competitive synergy with target?What competitive advantages do we get ?Is there any indicative price from Others?What is our walk away price?What is the target control premium we pay?Shall we face any cultural change management issues ?Is there any Tax Advantage?Is there any technological advantage?Will Orgnl. restructuring be needed? What happens if some key people leave?DownsizingRightsizingSynergy MaximisationDelayeringCross-functional MultitaskingRe-engineeringFunctional RestructuringBrightsizingRevitalisingTimesizingAncilarisingChange Management NeedsRepositioningSource: faculty.css.edu/dswenson/web/Powerpoints/ChangeDrivers.pptOrganisational realities to be identified and managed post the deal from BPM perspective 56
DD to Assess Nine Elements of Organisational Healthhttps://www.linkedin.com/topic/m%26a-due-diligence7Deal Making is glamorous, due diligence is not
Due Diligence is neither a pure science not an art. It is a combination of both. It also demand lots of sixth sense and professional intellect.
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About of half of deals fail to deliver the expected resultsThe most important need for success in M&A are
What objectives are to be achieved Scale or Scope
What are the hidden upside or down side effects
DD capabilities
Total discipline at each stage of the deal value chain
Discover what is not known about target
Not relying on the target for intelligence
What will be the effects on existing business 9Human aspects of financial due diligence
http://www.bain.com/publications/articles/human-due-diligence-video.aspx
Mitigating Risks While Doing Diligence Financial Due Diligence
https://www.youtube.com/watch?v=ysKvSx_SINk
What the Experts Opine about Mitigating Risks through Financial Due Diligence10
Corporate Due Diligence is also about detecting the skeletons in the cupboards of the target companyOne of the tasks for detecting skeletons is to strip away all accounting idiosyncrasies11
Illustrative Check List for Corporate Due Diligence12
http://www.eperinc.com/mergers-and-acquisitions-ma-environmental-due-diligence/ Two Stages of Corporate Due Diligence
Exploratory analyses to assess Potentials to generate return in a given time frame Due diligence is a rigorous process that finally determines whether or not the DEAL will go through. The process involves
Asking and answering a series of questions to evaluate all the aspects of the entity and the opportunity
Rigorous review and scrutiny of a large number documents past periods financial statements and projections;
Quantitative and qualitative review of synergies and integration
Qualitative review of managerial personnel and leadership team
Finding misrepresentations in the document of the prospective investee
The process is of two stages
Initial Screening - Whether the proposal fits the funds mandate or criteria, e.g., the business stage, geographic region, deal size, industry sector.
Detailed DD13Initial Screening Questions Quick Litmus Test questions for initial screening
Exact nature of business, product / service What is Unique?
Product potential
Possible areas of synergies and competitive advantages
Possible Intangible Assets not accounted for in Books of Accounts
Reasons of failure vis--vis previous suitors, if any
Post deal fund requirement and subsequent tranches if any
Board value settlement strategy expected by acquiree
Present location of business and plan for expansion in new areas
Broad operating plans and expansion
Technology Stage Uniqueness, horizon of substitution
Product / service life cycle
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Perspectives of FS Analyses for Broader UnderstandingIn-depth Study of Operations, Profitability and Financial State of AffairsDeeper Understanding BusinessRisk AnalysisSWOT - Raisepost deal ReturnsEnhanced Credibility of DD as An exercise DD as a Tool for Deal Negotiation16Financial Due Diligence Desk Top Financial Due Diligence(With or Without Internal Inputs)Post FactoFuturistic AnalysisOff - Balance Sheet FundsLT Arrangements with Customers & SuppliersContingent Liabilities and Commitments 17BusinessCombinationsInvestment in Equity18
Source: http://www.bain.com/bainweb/media/flash/popup_funnel_chart.asp
Strategic Due Diligence for Introspective Analysis Essential for Deal Closure
19 Analytical Due Diligence Bridging the Gaps in Understanding about the Target Product pipeline - Quantitative Growth Analysis of past and future with impacts of new products if any
Customer Contracts - Onerous or probability to turn onerous to profitable, volume commitments if deal is for backward integration
Supply Chain Arrangements for both Inputs and Outputs - Scope to rescind if tending to be loosing proposition - Price, Logistics, Product , Input and / or service availability
Existing Intra-group contracts - Need for Father-hooding / closure
Operating Profitability Identify any infected limb
Arresting down trend in Gross Margin - Efficacy of concrete remedial measures initiated or to be initiated post the deal
Order book (Construction Cos.) - With or without escalation
Trends in Prices - Inputs and Outputs
Inflation Adjustment - Success factor in passing cost increases to customers - Industry trend
Objectives of Transaction for DD - Specific issues to be addressed
Review & Analyses - Business Plan, Earnings Guidance and FSs20Nice, Essential & Must (NEM) - Outcomes from Analyses of Expenses
SWOT Leadership team view points revealed in MD&A Section
Capital Expenditure - Maintenance / Sustenance and Expansion
Projects in hand - Status for expansion, diversification, etc.
Market, Customer and Vendor - Major changes if any
Working Capital Model - Going Concern with our without fresh injection of short term funds
Projected FS - IS, BS, CFS in comparison to previous years after eliminating extra ordinary impacts; Past instances of failures in guidance - Earnings and Capital Expenditure to market
Cash Flow Forecasts - FCF, Term Loans, Quasi Equity Conversion with optional / compulsive commitment for Dilution
Sensitivity Analyses - for projected IS CF and BS
Contingent Liabilities - Possible, Probable and Remote (PPR) Analysis
Review & Analyses BP, EG and FSs 221Commitments and Insurance Contracts - Impacts on future performance
Employee Benefits Defined Benefits and / or Contribution
Statutory Audit Report Immediate and long term financial impacts of (a) Qualifications (b) Drawing Attention / Matter of Emphasis Paragraphs (c) Qualifications in CARO Value, Systems, Compliance, Failures
Corporate & Brand Images - Respect amongst industry peers
Sustainability Management 4P Approach
Status of Corporate Governance
Corporate Social Responsibilities
Regulations - Effects of any regulatory provisions on the anvil
Second Tier Focus Areas of DD Specific areas of focus and in depth analysis second tier reviewReview of BP, EG and FSs 32223Review of BP, EG and FSs 4A typical method for projecting each of General & Administration Expenses
Last years actual expenses MinusExpenses for last years one time activities MinusTargeted reduction from normal expenses MinusReduction arising out of planned discontinuation of old operations PlusExpenses for new activities contemplated for the budget year PlusExpenses for the budget years one time activities Plus/ MinusInflationary adjustment Plus/ Minus Increase/ decrease due to statutory provisions Plus/ Minus Increase/ decrease due to changes in regulatory provisions Equal to Next periods projected expenseNote: Certain expenses originate from oganisational culture and legacies Specific review is needed to understand whether those will continue.Review of BP, EG and FSs 5Exploratory analyses for assessing ability to ensure sustainable growthWhat are the plans, action points, capital and revenue expenditure for Reducing material intensity
Utility audit and reducing consumption of power, fuel, steam, water, etc.
Optimisation and substitution of raw natural resources
Minimising dispersion of toxic substances
Green logistics for renewable and used products
Recycling of scrap, wastage and spoilage
Prolonging product life at minimum differential price
Increasing service intensity to reduce frequency Similar points are also to explored for vendors CXOs to ensure viability and growth after absorbing all these expenditure 24Understand the revenue streams from MD&A and contemporary and foreseeable business ecosystemBusiness Segment (CGU)Product(s) Volume, Price, Customer SegmentGeography Domestic and Overseas (Country-wise)Competition, Regulatory changes, Coupling effects, etc.
Historical trends in pricing and gross margins
Business Model Revenue Generation, Growth & Expansion, Capital Structuring
Post sales events Trends in Sales ReturnsRework, Warranty and Customer Loyalty obligationsProvision for Doubtful Debts and write-off
Exceptional non recurring items
Write-off / impairment Receivables, FA, Investments
Review product profitability trends covering 80 % of turnover
Pricing pressures Competition, Materials and Conversion Costs
25Quality of Historical Earnings, Assets & Liabilities(If possible, with enquiries Industry Research reports and internal inputs)Sustainability of margins and recoverability of dues
Impact of changes in Key accounting policies Methodologies for measurement; affecting Accrual of IncomeDepreciationFixed Assets, Intangible Assets and GoodwillDebtors provisioning, Inventory Valuation, Capitalisation Valuation of Assets
Impact of material changes in financing arrangements and of any other profitability adjustments on Net Worth / Net Assets
Charges created on various assets Terms and conditions
Reconciliation of Profit as per IS and Tax RecordsStatus of Tax Assessments Availability of tax losses and other tax benefits / exposures Implications of tax liabilities and disputed demandsImpacts of pending disputes at various levels of judiciary
26Quality of Historical Earnings, Assets & Liabilities 22627
28Your Questions?