Joint Venture & Acquisition

DUE DILIGENCE
(for Mergers and Acquisitions)
Assignment 2 (30 Marks)

10 minutes presentation through PPT mode.

PPT to be submitted by 21.04.2019 (Sunday) on the e-mail
address drkshitiz@gmail.comwith CC to
cc.bft.jodhpur@nift.ac.in and ganpat.choudhary@nift.ac.in
and presentation is to be given in the ensuing class.
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“Due Diligence” Sub-Topics in Syllabus

- Due Diligence Process;

 Building a Team

 What the buyer wants to know?

 Due Diligence Problems;

DUE DILIGENCE : LEARN FROM THE PAST,

BUT LOOK TOWARDS THE FUTURE
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Why Due Diligence is Important for M&A….??

 To investigate into the Affairs of Business as a prudent business person

 To confirm all material facts related to the Business

 To assess the Risks and Opportunities of a proposed transaction.

 To reduce the Risk of post-transaction unpleasant surprises

 To confirm that the business is what it appears.

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Why Due Diligence is Important for M&A….Cont…

 To Create a Trust between two Unrelated Parties

 To identify potential deal killers defects in the target and avoid a bad business
transaction.

 To gain information that will be useful for

 Valuing Assets
 Representations & Warranties for Indemnification
 Negotiating Price Concessions

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 Financial Identify potential risks associated
and with the transaction & the
mitigating factors
Taxation

Identify key deal issues and deal

breakers and determine
possible reductions in the
purchase price

Legal and Due Operational

Contingent Diligence &
Technical
Obligation
Attain complete understanding of
the business and the assets

Assess integration and other post deal Human

matters Resource
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 DUE
DILIGENCE
PROCESS

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Diligence Process

Pre-Fieldwork Fieldwork Post-Fieldwork

Review Background Visit Data room

Material Preparation of Report

Consider Preliminary Review Audit Work Paper

Structure Finalize Structure

Assist with letter of Visit Target Company and

Interview Management Support Integration Plan
Intent
Develop workmen and Review financial model of
info Request List Target Company Read and Comment on
Sale Agreement

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Teamwork .... What Is It?
 A team is defined as a group (a collection of people) who
interact to achieve a common goal, but an effective, well-
functioning team is much more than this.

 Participants in an effective team care about the group's well-

being. They skillfully combine appropriate individual talents
with a positive team spirit to achieve results.

 Regardless of whether the program effort is that of an

individual, several individuals or the entire county office unit, a
climate of teamwork can exist.

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Building a Team
Delegate and empower appropriately
Promote debate and discussion on where we are,
where we want to be, and how we should get there –
use brainstorming, lateral thinking
Ensure that all the team has discussed, contributed to
and committed itself to the work tasks and objectives
Try to reach consensus decisions
Make sure the combined purpose and importance of
the team’s work is understood by everyone Keep
everyone informed on progress

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Types of Due Diligence Reviews – Purpose

Buy Side Diligence

(For ascertain what buyer are buying )

v/s

Sell Side Diligence

(Issues on which buyers can negotiate)

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Buy side Due Diligence

What the buyer wants to know?

 Financial analysis to support opinions and conclusions.

 Identification of hidden value in the target.
 Highlighting post-acquisition / integration / separation issues.
 Using expert resources in the target country to identify local risks and issues.
 Identifying areas that may impact the exit strategy of the equity provider.
 Analysing the sustainability of earnings and cash flows.

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Sell side Due Diligence

 Assists the vendor by providing an upfront independent review.

 Highlights sale and purchase agreement issues early that may become negotiating
points or areas for warranties/indemnities.
 Ensures a level playing field by providing all potential purchasers with objective
information.
 Reduces the level of due diligence procedures that potential purchasers need to
perform.
 Expedites the deal timetable by avoiding lengthy negotiations and disruption to
the
vendor.
 Reduces the risk of last minute value erosion and avoid lengthy re-negotiations.
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Documents To be checked in Due Diligence Processes

Important
Basic Information Financial Data
Business
Agreement

Litigation Aspects IPR Details

Marketing Information Internal Control System

Taxation Aspects Cultural Aspects Environmental Impact

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DUE DILIGENCE
PROBLEMS

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Due Diligence Problems

Inadequate reserves and

Inappropriate revenue Improper cutoff and
reversal of reserves
recognition rollover impact;
including inventory

Issues for representation

Unsophisticated financial Charge backs, rebates and warranties from the
reporting system and returns buyer

Implications of Financial & Restrictive

Related party transactions
Regulations, Taxes & Covenants in agreements
– stand alone issues
Duties – based on deal / legal documents
structure

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Some Practical cases

 When Dai-Ichi bank of Japan merged with Nippon Kangyo to form the then
biggest bank in the world called Dai-Ichi Kangyo, the two company executives

found even the definition of the word, ‘ loan ’ differed between the banks!
 They had to put out a 200-word glossary explaining the meaning of various
banking terms before they could even start!

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Some Practical cases Cont…

DAI ICHI AND RANBAXY DEAL

 Dai Ichi Sankyo paid $4.6 B for 63% of Ranbaxy A YEAR LATER IT
WROTE DOWN the value of the acquisition by $3.6 B.

 REASON: They did not know the depth and extent of Ranbaxy’s woes and full details of
the Food and Drug Administration (FDA) investigation into Ranbaxy. In fact in 2009 FDA
had shut down reviews of all pending or future drug applications from Ranbaxy’s Ponta
Sahib plant. The first-to-file atorvastatin (Generic for Lipitor world’s largest selling drug) was
the greatest attraction for Dai Ichi and that was fraught with many problems.

 DAI ICHI HAVE MADE INADQUEATE DUE DILIGENCE STAGE AND RESULT THEY EARN
HUGE LOSS.

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In Summary……Due Diligence Focuses On.

Quality Quality of Potential

Earnings & Liabilities &
of
Assets Cash Flows Commitment
s

Separation /
Structuring / Tax and Other
Integration Regulatory
Issues Issues

Other
stand
alone
issues
Co-ordination with other advisors and issues identified by them

Industry and market issues

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The goal of DUE DILIGENCE should
be

DEAL MAKING

not

KILLING…

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 THANK YOU

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