Due Diligence report - WIRC reports.pdf · Assisting through the transaction process Assisting with...
Transcript of Due Diligence report - WIRC reports.pdf · Assisting through the transaction process Assisting with...
Due Diligence report
November 2011
Assisting through the transaction process
� Assisting with carve-outs, information memoranda, data rooms
� Vendor due diligence
� Supporting the negotiation and completion phases of the
� Assessing the key issues facing the business and the
� Pre deal evaluation - initial assessment without access to the relevant business
� Bid support on public transactions
PRE DEAL EVALUATION PRE DEAL EVALUATION PRE DEAL EVALUATION PRE DEAL EVALUATION AND BID SERVICES AND BID SERVICES AND BID SERVICES AND BID SERVICES
TRANSACTION EVALUATION TRANSACTION EVALUATION TRANSACTION EVALUATION TRANSACTION EVALUATION
VENDOR ASSISTANCE VENDOR ASSISTANCE VENDOR ASSISTANCE VENDOR ASSISTANCE
CONTRACT ASSISTANCECONTRACT ASSISTANCECONTRACT ASSISTANCECONTRACT ASSISTANCE
Transaction Transaction Transaction Transaction IdentificationIdentificationIdentificationIdentification EvaluationEvaluationEvaluationEvaluation ProjectProjectProjectProject
ExecutionExecutionExecutionExecutionIntegration/ Integration/ Integration/ Integration/ SeparationSeparationSeparationSeparation
ValueValueValueValueRealisationRealisationRealisationRealisation
Vendor assistance
Transaction evaluation
Pre deal evaluation andbid services
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and completion phases of the deal, advising on:− scope of warranties and
indemnities− price adjustment
mechanisms− contract drafting
facing the business and the drivers behind maintainable profits and cash flows by:− commercial analysis of
relationships and operations
− market studies� An investigative analysis of a
business, typically including:– balance sheet, results,
projections– tax– cash flows– commercial issues– management information– systems and controls– pensions, compensation,
benefits– legal issues– environmental matters
� Assisting with the creation of efficient deal structures and optimising the tax, accounting, commercial and legal position
STRUCTURING ADVICESTRUCTURING ADVICESTRUCTURING ADVICESTRUCTURING ADVICE
� Identifying and assessing synergies and separation issues
INTEGRATION/SEPARATIONINTEGRATION/SEPARATIONINTEGRATION/SEPARATIONINTEGRATION/SEPARATION
Contract assistance
Vendor assistance
Transaction structuring
Integration/Separation
BUSINESS / TRANSACTION ISSUE BUSINESS / TRANSACTION ISSUE BUSINESS / TRANSACTION ISSUE BUSINESS / TRANSACTION ISSUE
COMMENTS ON BUSINESS / TRANSACTION ISSUE COMMENTS ON BUSINESS / TRANSACTION ISSUE COMMENTS ON BUSINESS / TRANSACTION ISSUE COMMENTS ON BUSINESS / TRANSACTION ISSUE APPROACHAPPROACHAPPROACHAPPROACH
� Revenues, billing rates and margins Revenues, billing rates and margins Revenues, billing rates and margins Revenues, billing rates and margins � There could be pressure on the billing rates either due to competition or specific domain characteristic
and these rates could be on a declining trend. Accordingly, future margins could be under pressure
due to declining billing rates.
� Complex customer contracts with onerous clauses may have an impact on revenue recognition and future
obligations of the Target.
� Employee costs could be rising which would reduce future margins. Also, inefficient use of leased line
connectivity and bandwidth would increase communication costs and would reduce margins.
� Analyze the quality of earnings of the Target and highlight and comment
on key underlying historical trends in primary drivers such as billings rates,
utilization levels, mar\gins.
� Read significant onerous clauses in customer contracts and analyze
revenue recognition.
� Analyze trends in employee costs and telecommunication costs and assess
future implications.
In assessing existing value it is advisable to be able to assess Business Issues
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� Quality of customers Quality of customers Quality of customers Quality of customers � What is the customer profile – are there any indirect customers. What is the % of indirect business
revenues as % of total revenues.
� There could be risk of customer concentration with a significant revenues being derived from a small
customer base. Hence, loss of key customers can adversely impact revenues and profitability of the
Target.
� Which employees manage the key customer relationships and how is the quality of the customer
relationships ? Are there any customer litigations, outstanding disputes and complaints?
� \Who are the “value deflators” ie customers with low margins?
� Analyze historical trends of revenues by the key customers, with focus on
repeat business from customers, trends in billing rates, significant accounts
won and lost in the past.
� Obtain sales pipeline and evaluate committed revenues.
� Analyze % of indirect customer revenues as % to total revenues.
� Meet with key customers and understand the quality of relationships, future
revenue potential and any concerns on target’s service delivery model.
� Identify the key employees and senior management who manage the key
customer relationships and design and implement compensation packages
that will retain these employees. Execute non compete agreements with
employees not retained post acquisition.
In assessing value we compare the total cost of your investment with potential value creation opportunitiesIn assessing value we compare the total cost of your investment with potential value creation opportunitiesIn assessing value we compare the total cost of your investment with potential value creation opportunitiesIn assessing value we compare the total cost of your investment with potential value creation opportunities
CONSIDERATIONCONSIDERATIONCONSIDERATIONCONSIDERATION VALUE CREATIONVALUE CREATIONVALUE CREATIONVALUE CREATIONversusversusversusversus
Can value be conservedCan value be conservedCan value be conservedCan value be conserved
or created?or created?or created?or created?
Does the Does the Does the Does the
value support value support value support value support
the price?the price?the price?the price?
What are the risks?What are the risks?What are the risks?What are the risks?
Identification Identification Identification Identification –––– understanding the transaction understanding the transaction understanding the transaction understanding the transaction
The approach to assessing value
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Destroy
shareholder
value
Val
ue $
mVal
ue $
mVal
ue $
mVal
ue $
m
Create
shareholder
value
Target
risk
SynergiesSynergiesSynergiesSynergies
New strategiesNew strategiesNew strategiesNew strategies
Sta
ndSta
ndSta
ndSta
nd-- --al
one
alon
eal
one
alon
e
valu
e
va
lue
va
lue
va
lue
Sta
ndSta
ndSta
ndSta
nd-- --al
one
alon
eal
one
alon
e
valu
e va
lue
valu
e va
lue
Dea
l co
sts
Dea
l co
sts
Dea
l co
sts
Dea
l co
sts
Tota
l co
st o
f To
tal
cost
of
Tota
l co
st o
f To
tal
cost
of
tran
sact
ion
tran
sact
ion
tran
sact
ion
tran
sact
ion
Integration
risk
Reporting to reflect overall approach
� Refine our understanding of key risks and opportunities
� Challenge the target’s assumptions
� Challenge and test our client’s overlays (eg.
synergies) � Quantify impact of issues in isolation and in
3. INTERPRETATION3. INTERPRETATION3. INTERPRETATION3. INTERPRETATION
2. EVALUATION2. EVALUATION2. EVALUATION2. EVALUATION� Understand transaction rationale and critical success
factors
� Understand the target business – identify key value
drivers
� Quantify the key value drivers and risks
� Scope the assignment (with you)
1. IDENTIFICATION1. IDENTIFICATION1. IDENTIFICATION1. IDENTIFICATION
Overview Overview Overview Overview –––– a “typical” acquisitiona “typical” acquisitiona “typical” acquisitiona “typical” acquisition
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synergies)
� Consider implementation risk
� Start to identify key sensitivities
� Quantify impact of issues in isolation and in
combination
� Establish whether base case is pessimistic, realistic or
optimistic
� Prioritise issues in terms of impact on value
4. REPORTING4. REPORTING4. REPORTING4. REPORTING
Note: the above assumes an acquisition
Our fieldwork conclusions are drawn together by focusing on the issues critical : deal breakers, valuation issues, contract iOur fieldwork conclusions are drawn together by focusing on the issues critical : deal breakers, valuation issues, contract iOur fieldwork conclusions are drawn together by focusing on the issues critical : deal breakers, valuation issues, contract iOur fieldwork conclusions are drawn together by focusing on the issues critical : deal breakers, valuation issues, contract issussussussues and integration issueses and integration issueses and integration issueses and integration issues
Phase Issue identification, for example: Evaluation
Cost base and
margins
Market size and
geography
Environmental and
regulatory
Breadth of
offeringDeal structuring Staffing levels Brand perception
KEY FINDINGS AND ADVICE:KEY FINDINGS AND ADVICE:KEY FINDINGS AND ADVICE:KEY FINDINGS AND ADVICE:
INITIAL VALUE Deal Deal Deal Deal
Our transaction approach Our transaction approach Our transaction approach Our transaction approach ---- focusing on the issues criticalfocusing on the issues criticalfocusing on the issues criticalfocusing on the issues critical
Timing of Conclusions
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INITIAL VALUE
ASSESSMENT
PRELIMINARY
INVESTIGATION
DETAILED INVESTIGATION
Integration Integration Integration Integration
issuesissuesissuesissues
Contract Contract Contract Contract
termstermstermsterms
Valuation Valuation Valuation Valuation
issuesissuesissuesissues
Deal Deal Deal Deal
breakersbreakersbreakersbreakers
SuccessfulSuccessfulSuccessfulSuccessful transactiontransactiontransactiontransaction
Oral reporting
A written report is not the only report
IssuesIssuesIssuesIssues
Concerns/ RisksConcerns/ RisksConcerns/ RisksConcerns/ Risks
Key assumptionsKey assumptionsKey assumptionsKey assumptions
Key value driversKey value driversKey value driversKey value drivers
Focus on what’s
important
KPMG
Scope
Client’s key Client’s key Client’s key Client’s key
questionsquestionsquestionsquestions(Specific & Generic)(Specific & Generic)(Specific & Generic)(Specific & Generic)
Info requestDatabooks
(Grill the numbers/
working papers)
OUTPUTSOUTPUTSOUTPUTSOUTPUTS
StrategyStrategyStrategyStrategy
PrePrePrePre----deal evaluationdeal evaluationdeal evaluationdeal evaluation
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Key value driversKey value driversKey value driversKey value drivers
Business advice & Business advice & Business advice & Business advice &
Oral reportingOral reportingOral reportingOral reporting
Written Written Written Written
reportsreportsreportsreports
DatabooksDatabooksDatabooksDatabooks
OUTPUTSOUTPUTSOUTPUTSOUTPUTS
Trusted Adviser behaviourTrusted Adviser behaviourTrusted Adviser behaviourTrusted Adviser behaviour
NegotiationNegotiationNegotiationNegotiation
Assistance/ SPAAssistance/ SPAAssistance/ SPAAssistance/ SPA
Post Deal Support Completion accounts
Vital elements in a report
DUE DILIGENCE REPORTDUE DILIGENCE REPORTDUE DILIGENCE REPORTDUE DILIGENCE REPORT
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STORYSTORYSTORYSTORY
BOARDINGBOARDINGBOARDINGBOARDING
BUSINESS BUSINESS BUSINESS BUSINESS
ISSUES FRAMEWORKISSUES FRAMEWORKISSUES FRAMEWORKISSUES FRAMEWORKVALUE DRIVER ANALYSISVALUE DRIVER ANALYSISVALUE DRIVER ANALYSISVALUE DRIVER ANALYSIS HYPOTHESIS TESTINGHYPOTHESIS TESTINGHYPOTHESIS TESTINGHYPOTHESIS TESTING
Oral reporting
Oral Reporting – use the continuous reporting approach
Issues BoardIssues BoardIssues BoardIssues Board
Risk barometerRisk barometerRisk barometerRisk barometer IssueIssueIssueIssue ImplicationImplicationImplicationImplication ResponseResponseResponseResponse ActionActionActionAction StatusStatusStatusStatus
HHHH • Impact of economic
downturn
• Industry outlook shows
deteriorating volumes over
medium term
• Margin Erosion, Lower
Volumes will negatively
impact target’s overall
profitability
• Margin and volume
analysis to be undertaken
• Commercial Due
Diligence (CDD) Team,
Client‘s Valuation Team
HHHH • Defined benefit pension • How do we assign • Perform Pension Due • Pension Team
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scheme, liabilities doubled
in last year due to
deterioration of financial
markets.
valuation to this liability? Diligence
HHHH • Foreign currency risks due
to high fluctuations in
strength of sterling
(exposure resulting from
foreign sales)
• The forecast results will
be impacted by recent
foreign exchange
movement
• Consider impact on the
model
• CDD Team, Client‘s
Valuation Team
Oral reporting
Who gives oral advice?
Who gives the advice?Who gives the advice?Who gives the advice?Who gives the advice?
� Proportional to complexity and risk
− Partner
− Associate Director
� Reporting facts
− Manager and Assistant Manager
− Subject to approval from team leader
Risk managementRisk managementRisk managementRisk management
� Same evidence required as report
� Don’t go beyond scope of our report/Engagement letter
� Keep copy of presentation and minutes
� Caveats at front of presentation and in handouts
� Clearly source all information
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− Subject to approval from team leader
� What can we say?
− Same as report
− Must be supported with databook/working papers
� Records must be kept of key oral meetings
Report planning
Know your reader
Different readers of a report have different requirements:Different readers of a report have different requirements:Different readers of a report have different requirements:Different readers of a report have different requirements:
Acquisition due diligenceAcquisition due diligenceAcquisition due diligenceAcquisition due diligence
� May be possible to produce a shorter report focussing on key hypothesis
rather than a detailed report
� More likely to be asked to report on specific areas e.g. value creation
Vendor due diligenceVendor due diligenceVendor due diligenceVendor due diligence
� May not know the type of buyer and therefore needs to appeal to all
� May generally be more detailed covering all aspects of the business
� Need to show more detailed financial data:
− tables more effective than charts
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Corporate clientCorporate clientCorporate clientCorporate client
� Already has a good understanding and hence more issues-focussed
� Will often require information on integration, synergy issues
� Will often be interested in internal control procedures
� Emphasis on monthly cash flows, sustainable EBITDA, capex
requirements and net debt
� Reports are required for bank lending approval
� Scope of report must focus on assumptions underlying the indicative offer
letter
� Requirement to consider “base case” and “upside” planning scenarios
Private equity clientPrivate equity clientPrivate equity clientPrivate equity client
Report planning
A written report is not our only deliverable
IssuesIssuesIssuesIssues
Concerns/ RisksConcerns/ RisksConcerns/ RisksConcerns/ Risks
Key assumptionsKey assumptionsKey assumptionsKey assumptions
Key value driversKey value driversKey value driversKey value drivers
Focus on what’s
importantScope
Client’s key Client’s key Client’s key Client’s key
questionsquestionsquestionsquestions(Specific & Generic)(Specific & Generic)(Specific & Generic)(Specific & Generic)
Info requestDatabooks
(Grill the numbers/
working papers)
OUTPUTSOUTPUTSOUTPUTSOUTPUTS
StrategyStrategyStrategyStrategy
PrePrePrePre----deal evaluationdeal evaluationdeal evaluationdeal evaluation
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Key value driversKey value driversKey value driversKey value drivers
Business advice & Business advice & Business advice & Business advice &
Oral reportingOral reportingOral reportingOral reporting
Written Written Written Written
reportsreportsreportsreports
DatabooksDatabooksDatabooksDatabooks
OUTPUTSOUTPUTSOUTPUTSOUTPUTS
Trusted Adviser behaviourTrusted Adviser behaviourTrusted Adviser behaviourTrusted Adviser behaviour
NegotiationNegotiationNegotiationNegotiation
Assistance/ SPAAssistance/ SPAAssistance/ SPAAssistance/ SPA
Post Deal Support Completion accounts
Reporting risk management
Risk management - What one can and cannot say?
No definitive list exists of “good” or “bad” No definitive list exists of “good” or “bad” No definitive list exists of “good” or “bad” No definitive list exists of “good” or “bad”
existsexistsexistsexistsRisk framework and principles applyRisk framework and principles applyRisk framework and principles applyRisk framework and principles apply
Key areas of riskKey areas of riskKey areas of riskKey areas of risk
� Business advice
� Underlying performance
� Projections
� Commentary on accounting estimates
� Avoid assurance type opinions
� Give clients options, don’t provide instructions
� Explain basis of conclusions and provide
supporting evidence
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� Commentary on accounting estimatessupporting evidence
Everything we do!Everything we do!Everything we do!Everything we do!
� Recognise the risk and manage it
Report planning
What do clients want? Or not want?
What clients want:What clients want:What clients want:What clients want:
1.1.1.1. Recommendations and business adviceRecommendations and business adviceRecommendations and business adviceRecommendations and business advice
2.2.2.2. Well supported conclusionsWell supported conclusionsWell supported conclusionsWell supported conclusions
3.3.3.3. Issues and findings linked to SPA and valuationIssues and findings linked to SPA and valuationIssues and findings linked to SPA and valuationIssues and findings linked to SPA and valuation
4.4.4.4. Balanced views: both positive and negativeBalanced views: both positive and negativeBalanced views: both positive and negativeBalanced views: both positive and negative
5.5.5.5. Areas of comfort Areas of comfort Areas of comfort Areas of comfort –––– if there is something positive to say then say it!if there is something positive to say then say it!if there is something positive to say then say it!if there is something positive to say then say it!
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What clients don’t wantWhat clients don’t wantWhat clients don’t wantWhat clients don’t want
1.1.1.1. Hanging issues Hanging issues Hanging issues Hanging issues –––– no quantificationsno quantificationsno quantificationsno quantifications
2.2.2.2. More work to doMore work to doMore work to doMore work to do
3.3.3.3. SurprisesSurprisesSurprisesSurprises
4.4.4.4. Issues which are not issuesIssues which are not issuesIssues which are not issuesIssues which are not issues
Abizer DiwanjiAbizer DiwanjiAbizer DiwanjiAbizer Diwanji
PartnerPartnerPartnerPartner
KPMG India Private Limited ,
Lodha Excelus, 3rd floor,
Apollo Mills Compound,
N.M. Joshi Marg,
Mahalakshmi,
Mumbai 400011.
Thank you and questions
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© 2011 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent mem© 2011 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent mem© 2011 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent mem© 2011 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent memberberberber firms affiliated with KPMG International firms affiliated with KPMG International firms affiliated with KPMG International firms affiliated with KPMG International
Cooperative ("KPMG International"), a Swiss entity. Cooperative ("KPMG International"), a Swiss entity. Cooperative ("KPMG International"), a Swiss entity. Cooperative ("KPMG International"), a Swiss entity.
The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International CooperativThe KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International CooperativThe KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International CooperativThe KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative (e (e (e ("KPMG International")."KPMG International")."KPMG International")."KPMG International").
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E-mail: [email protected].