Transcript
Due Diligence
Akul JhajhariaAbhimanyu Suresh
Gaurav Swamy
MeaningO The care that a reasonable person
exercises to avoid harm to other persons or their property.
O Research and analysis of a company or organization done in preparation for a business transaction (as a corporate merger or purchase of securities).
Steps for Due Diligence Process
O Planning PhaseO Data CollectionO Data AnalysisO Report Finalization Phase
Steps for Due Diligence of Stocks
O Capitalization of the CompanyO Revenue, Profit and Margin TrendsO Competitors and IndustriesO Valuation MultiplesO Management and Share ownershipO Analysis of Balance sheetO Stock Price HistoryO Stock options and Dilutions PossibilitiesO ExpectationsO Risks
Types of Due DiligenceO Legal Due DiligenceO Financial Due DiligenceO Business Due Diligence
Legal Due DiligenceO Pending lawsuits against the CompanyO Pending lawsuits initiated by Company O Description of environmental and
employee safety issues and liabilities O List of material patents, copyrights,
licenses, and trademarksO Summary of material contacts O History of SEBI or other regulatory
agency problem, if any.
Case: Northstar Life Services
O A client submitted a life policy that it was considering purchasing to NorthStar, along with the related due diligence materials, for review and risk analysis.
O The client wanted to assess the risks if any.
Key IssuesO Legal department was able to identify that the
policy owning trust was established for the benefit of a “friend of the insured.”
O The laws of most states specifically provide that a person who purchases a life policy must have an “insurable interest” in the insured at the time the life policy was originated.
O In addition, this particular case was originated in a state that takes the position that a life policy purchased for the benefit of someone lacking insurable interest is treated as void.
BenefitsO The client passed on the purchase of
this life policy based on NorthStar’s risk analysis.
O NorthStar was able to identify a clear risk that the carrier may later raise the insurable interest issue to attempt to avoid paying the related death claim on this life policy.
Financial Due Diligence
O Annual and quarterly financial information for the past three years
O Financial ProjectionsO Capital Structure O Other financial information
Case: Riveron PE FirmO Riveron served a private equity client who
pursues investment opportunities across different sectors.
O Its management team focuses on companies with revenues between $20 million and $150 million.
O They specialise in management buyouts, recapitalizations, and growth, among others.
O Their client had a letter of intent to purchase a multi-unit retailer with $100 million in sales, as an add-on acquisition for an existing portfolio company.
ApproachO Coordinated with target executives to obtain
information necessary to evaluate and support the historical and projected financial position of the business.
O Focused on a full operational review, identifying key risk factors and operational metrics, plus analyses of forecasts, the balance sheet, and working capital.
O Initial findings were reported to the client daily.O Draft report was used to assist in final deal
negotiations.O Final report was issued to complete the engagement
and financing with the lender.
OutcomeO Able to isolate certain issues
through our detailed review of balance sheet accounts.
O Highlighted certain areas of ongoing financial and operational risk.
O Client used these findings to assist in final deal negotiations and deal structure, and to define areas of post-transaction focus.
Business Due DiligenceO Organization and Good StandingO Financial InformationO Physical AssetsO Business ModelO Employees and Employee BenefitsO Customer Information
Case: KPMGO The client was considering an
investment in certain business units of an established facilities management provider.
O The client wanted to better understand the key financial, tax and commercial factors affecting the Target business in order to make an informed investment decision.
Key IssuesO The composition and valuation of the
target’s assetsO The company's revenue recognition policy
and other key accounting policiesO The level of revenues and costs, which are
expected to recur in the future as a basis for purchase price negotiations
O Tax structuring opportunitiesO Key management at the Target whose
retention would be critical to the business post acquisition
OutcomeO Enhanced the probability of success
by providing intelligence on key risks and benefits throughout the transaction.
O Addressed client’s key questions and concerns, helping management to understand the post-closing implications early on in the due diligence process.
O Gave them the confidence to move forward and close the transaction on the best terms.
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