a ‘DUE DILIGENCE( DUE DILIGENCE ‘What is Due Diligence? Presented to: Ms. Nidhi Goel ‘Subject: Strategic Financial Management Presented by: ‘Anney Banderwal (75112) Ayushi Sharma (75114) Lorika Azad (75130) BFIA 3AWhat is Due Diligence? The term "Due diligence" is used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. Interms of Finance, Its the process of research and analysis that takes place in advance of an acquisition, investment, business partnership or bank loan in arder to determine the value of the subject of the due diligence or whether there are any “skeletons in the closetDue diligence is necessary to limit reliance placed on vendor's warranties — it is better to discover all the relevant facts before the business is bought than afterwards. The costs of buying a business with unexpected difficulties can be disastrous.egal Due Diligence Supplier and client contracts + Employees’ contracts + Any areas that could give rise to litigation against the company + Ownership of assets + Details of any past litigation that may have occurred + Protection of intellectual property that the company may hold@rver Case- PWC The client considered acquiring a target at a high acquisition price, based upon the representation of the seller that the target would have a “secured” turnover over the next 10 years. The client wanted to assess the legal risks related to the target and its business. The key focus was to identify any risks which may jeopardize the future turnover of the company.ew of corporate structure, ownership of assets, business contracts, financing and securities, etc. + Perform an in-depth @rveri analysis of the key business contract Findings + Identification of a key business contract which was fundamental for the future turnver and profitability of the target + A possibility of early termination of the so- called long term contract was revealedBusiness Due + Reviewing the manageme + The market potential + The product or service (and t it meets) + The business model. @rveriCase- Bain and Company Box, a leveraged buyout firm, had identified PackageMaster, a plastics packaging company, as a potential acquisition target. But L-Box needed to quantify the potential benefits befor it closed the deal ‘depend on: ership position in its core business segment sgment and PackageMaster’s ability to compete in it Fweeks to perform the due diligence that L-BOX needed so it could move quickly to complete the dealApproach 1, Market Sizing 2. Market Penetration Assessment 3. Margin Potential Analysis 4. Customer Interviews Bain recommended that L-BOX bid for ackageMaster up to a certain price @rveriPackageMaster EBITDA 30%. 20% 25%: 15%, 12% 10%. 5%, 0%,Financial Due + Previous years' accounts + The tax position of the company Confirmation that tax documents ve been filed correctly and on time communication with HMRC and @rveri@rver Case- Otten Consultancy The client needed to be assured that a firm they wanted to buy showed correct figures in its financial reports, its accounting is correct and transparent, and tax risks are not significant.Approach + The investigated firm was an agricultural company + Copy of accounting database were received for analyzing, The specialists went to the targeted firm for revision of primary documents and for interviewing of personnel (mainly management, agronomists and accounting department). + According to instructions of the firm's management the purpose of the visit was disclosed (top-management presented the consultants as auditors). + During the visit to the client's office they did random checks to verify the correctness of the financial reports, management reporting provided additionally and compared this information with other data sources and average data from other agro-companies analyzed earlier.+ Cost of products and other expenses Tax risksFindings and recommendation + Overstated residual value of machinery + Some fertilizers and chemicals were in fact not bought, but in parts they were written-off as used in production + Several units of fixed assets were given as a mortgage twice + Advances paid were not closed even if services were rendered + Doubtful debts were booked according to primary value even though limitation period was passed due + Bank loans in EUR were not re-evaluated since 2008 (current rate was 35% higher), that significantly understated liabilities of the firm + Loan interest obligations were not paid more than a year, but were not booked as liabilities + Use of tax evasion strategies The client significantly decreased the price of the firm and negotiated with the seller a deposit fee in amount of possible tax risks.+ Imported as a process by foreign investors/their legal and financial advisors after the economic liberalization reforms of 1991 + No statute defines the term ‘due diligence. However, the SEBI mandates, certain parties to undertake a due diligence, in the context of issuance of securities by a company.LULU Legally Required Due Diligence er VII of the ICI ie BRLMs to exercise lemselves about all the the BRLM to submit a due er the format specified in long with the final post- b), the lead banker is er the issuance of BI or after the expiry of the the SEBI has not issued e diligence certificate at ospectus with the Regist!Options Available To withdraw from the deal To adjust the valuation of the investment To have the problem remediedPlanning Phase NYA“ §o-Data Collection Internet Regulatory organizations and databases Competitors Vendors Customers Industry associations Chambers of commerceData Analysis Phase Business models Functional complexity Technical complexity Infrastructure requirementsReport Finalization Phase| A Company without assets acquires a company p= without a clue- The case of AOL- Time Warner merger America Online merged with Time Warner in a deal valued at a stunning $350 billion. The trail of despair in subsequent years included countless job losses, the decimation of retirement accounts, investigations by the Securities and Exchange Commission and the Justice Department, and countless executive upheavals. Today, the combined values of the companies, which have been separated, is about one-seventh of their worth on the day of the merger. (2010) @rvon a—ZDeal Detai' nuary 10, 2000 , AOL- 55% Equal board members from both companies Media gave mixed reactions to the deal i investors regarding misrepresentation after revenues Cultural clashes and poor leadership #-December 2009 @rrezi+ Dot com bubble had inflated the price of AOL + A key component of the merger hinged on AOL's current and future ad revenue, which was intentionally inflated. + The SEC launched an investigation and AOL/Time Warner would be forced to pay millions in fines and restate past earnings. + AOL had no cables to support the broadband subscriber baseThank you!a ‘DUE DILIGENCE