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For Mergers, Acquisitions, Private Equity & Venture Capital Mergers Acquisitions
KANG, Jong Tak PARK, Jae Hong
Financial Advisory Services October 6, 2005
1. Due Diligence Process Overview
Financial and Tax Due Diligence Process
Due Diligence Activities
Supplemental Management Interviews / Data Requests/Analyses
Closing / Definitive Bring Down Agreements Diligence g
Communication, Analyses, Interim Deliverables
Due Diligence Process
Improve/Validate Valuation Model & D l St t Deal Structure
Value drivers determine the merit, price, and structure of a transaction – and define the nature and scope of the due diligence
Diligence Procedure P d
IT Human Capital Risk Management Forensic / Investigative Services Legal
Develop Additional Negotiating Leverage Provide feedback on Acquisition Agreements
Identify, Assess & Minimize Risk
2. Pre Due Diligence – Getting started
Launching a Project
• New client acceptance / background checks • Pre approval by audit committee, if applicable • Engagement letter • SA setup • Infrastructure for foreign office billing • Budget g • Working group list • Look up other office team members on warehouse • Travel plans, directions • Confidentially agreement
Launching a Project - What Should I Ask ?
• Who is our client? • Is this an existing client? • Who do we need on this deal from our group? • What other functions should be involved? • Foreign office involvement? • Are we going to need industry specialists? • Who does the tax compliance / advisory work? • When will we have access to the auditors?
Launching a Project - What Should I Ask (cont’d)?
• What are the deadlines? • What is the fee expectation? • What are foreign office’s fee expectations, exchange rate? expectations • What kind of report does the client expect and how often? • Will this be a phased approach? • What do we need to bring to the company / data room? • Dress code?
Launching a Project - What Else Should I Be Doing ?
• Set up initial call with client and target • Understand client’s expectations re: scope and deliverables • Lookup background information • Comparative regulatory body (i.e. SEC, FSS, etc) filings • Distribute information package • Develop work plan, issues list • Document request list Consider existing d t room i d C id i ti data index i f information ti • Access letter (Accounting and Tax)
Launching a Project – Key Information
• Initial information package • Cli t contact information Client t ti f ti • Target contact information • Client and Target advisor information – attorneys, actuaries, etc. • Target offering memorandum (“OM”) / Information Memorandum (“IM”) • Letter of intent (“LOI”) / Memorandum of Understanding (“MOU”) • Term sheet • Client model – capital structure and method of financing • Draft purchase agreement • Client memoranda / acquisition analyses • Competitor filings • Data room index g p y • Target Company Website
Launching a Project – Data Request Considerations
• Auction, exclusive, public, etc. • Agreed upon scope and work plan • Prioritize requests • Existing info – i.e. data room documents • Time period requested • Requests should be numbered to organize responses • Use to facilitate discussions with management
Launching a Project – Client’s Viewpoint
• Primary motivation / Value Drivers • P i i Pricing • Risks / Exposures • Opportunities • Hold / Exit strategies • What is the quality/reliability/sustainability of EBITDA/GAAP earnings? • Are “normalizing” adjustments appropriate? • What is stability/certainty/reliability of future cash flows? • Walk away from deal? • Reduce/modify offering price? • Obtain contractual protections? • Change post-acquisition plans? p y • Where is the value of the company and where are “black holes”? • Management capabilities?
Launching a Project – Client’s Need
• How is our client going to utilize our work product? • Structure and value deal • Negotiate purchase price and purchase agreement • Negotiate covenants • Determine future financing strategies • Identify post closing operational focus areas • Financial statement impact of transaction • Apply impact of accounting principles
Launching a Project – Deal Considerations
• Strategic vs. PEI (Private Equity Investor) • Auction vs. exclusive • Geographical / channel / market share expansion • Asset vs. stock deal • Cash flows / EBITDA • GAAP earnings • Exit strategy
Pre Due Diligence – Prepare Preliminary Issues List
• Dependent on available information (10K, OM, etc) • Highlight preliminary issues to focus diligence efforts • Consider timing and prior experience with client • Refine scope • Look for deal breakers
Pre Due Diligence – Balance Sheet and Income Statement
Objective – identify: Major fluctuations Non-recurring items g Significant accounts EBITDA adjustments Normal levels / seasonal trends Working capital requirements Unusual accounting practices Impact of changes in accounting practices Tax exposures Unrecorded obligations / liabilities
Pre Due Diligence – Financial Model
• Transaction structure and accounting & tax treatment • Consistency with pre due diligence • Return sensitivity to financial factors • Integrity of model • Tax considerations • Sources & uses of funds • Future operating plan i.e. spin-off, add-on • Timing
Pre Due Diligence – Transaction Agreements (LOI, term sheet, MOU, financing agreements)
• Structure proposed • Purchase price adjustment mechanism • Representation and warranties • Earn outs • Debt covenants • Tax indemnities and basis for tax allocations • Timing
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