M&A Due Diligence Workshop - Deloitte
M&A due diligence workshop2017 Engineering and Construction Conference
IntroductionsBruce GribensPartner M&A Transaction Services (Tax)Direct: 1 415 783 5959Email: bgribens@deloitte.comLocation: San Francisco, CAJames “Mark” AndrewsManaging DirectorM&A Transaction Services (IT)Direct: 1 215 789 2757Email: jaandrews@deloitte.comLocation: Philadelphia, PABryan JohnsonSenior ManagerM&A Transaction ServicesDirect: 1 617 437 3657Email: bryjohnson@deloitte.comLocation: Boston, MATodd WilsonManaging DirectorM&A Transaction ServicesDirect: 1 312 486 3892Email: twilson@deloitte.comLocation: Chicago, ILRob StrahleSenior ManagerEngineering & Capital ProjectsDirect: 1 212 436 7439Email: rstrahle@Deloitte.comLocation: Jersey City, NJCopyright 2017 Deloitte Development LLC. All rights reserved.2
AgendaTopicPresenter(s)TimingIntroductionsAll5 minutesThe M&A Lifecycle and Overview ofTransaction ExecutionTodd Wilson / Bruce Gribens5 minutesImportance of Integrated Due DiligenceMark Andrews / Bryan Johnson /Rob Strahle10 minutesFunctional Due Diligence BreakoutsCopyright 2017 Deloitte Development LLC. All rights reserved. Accounting, Finance, & TreasuryTaxITProject Due Diligence Todd Wilson and Bryan JohnsonBruce GribensMark AndrewsRob Strahle25 minutes each3
The M&A Lifecycle andOverview of Transaction Execution
M&A Lifecycle OverviewA multidisciplinary and integrated approach is key to success across the M&A lifecycleThe M&A LifecyclePre-dealM&A Strategy Establish a broad corporatestrategy and assess means torealize that visionPre-AnnouncementTarget Screening Define and prioritize acquisitioncriteria to apply to entireuniverse of potential targets Review portfolio against valuecreation and strategicimperative Collect screening data fromentire universe of potentialtargets, and apply the Assess and prepare for multiple, acquisition criteria to evaluatepotential fitpotential acquisition pathways Prioritize initial acquisitionto achieve goalscandidates and develop profiles Identify, evaluate, and prioritizestrategies for achieving organic High level pre deal integrationplanning and initial diligence forand inorganic growthsynergy opportunities Assess capability to undergo astrategic M&A program Establish decision rights andaccountability within theorganization Detailed screening of potentialtargets on the basis of businessstrategy, competitive strategyand value potential Valuation of business entities,including financial modeling,approaches, and challengesCopyright 2017 Deloitte Development LLC. All rights reserved.Diligence & EvaluationPost-AnnouncementIntegration /Separation Planning Conduct Financial / Accounting Establish operating model andand Tax diligenceoverall integration blueprint Perform business duediligence, includingcommercial, operations, IT,and HR Organize controls such asintegration management officeand synergy / work threadteams Initial internal controlsdiligence Conduct clean room analysis tofront load synergy capture Identify core and non-coreportfolio assets and eventualsale opportunities Develop Day One requirementsand End State plans Negotiations executionincluding deal valuation, assetor target valuation andstructuring Refine integration planning ontarget Design customer, market,product and organizationalstrategies Address people and cultureissuesIntegration /Separation Execution Provide “Day 1” stabilization of theorganization and functionalcapabilities Execute and manage integrationplans Deploy all clean room analysis andimmediately execute on synergyopportunities Define customer retention,workforce transition,communication and growth plans Integration Execution Support IP rights protection andmanagement Develop and execute acommunications strategy5
Leading PracticesLeading companies tightly integrate their upstream and downstream M&A ivestitureIntegration CurveApproach RiskRequiredLevel ofResourcesHandoff RiskExecutionRiskTransaction CurveLowStartApproach Risk:Resources are focused on the transaction andnot integration and its associated costsM&A LifecycleHandoff Risk:Resources dedicated to integration are notadded to the team early enough to sufficientlyprepareEndExecution Risk:Resources most knowledgeable with thetransaction do not remain on the team throughthe integration phaseA holistic, integrated approach minimizes risks, gaps and handoffs and captures valueCopyright 2017 Deloitte Development LLC. All rights reserved.6
Due DiligenceA dynamic set of activities involving working with many unknowns identified via aniterative process & addressed when the acquirer takes eventual control of the targetTypical Due Diligence Issues Early capture and realization of synergies fromthe M&A transaction Uncertainty around target management’sclaims on growth Stability of customer base Accelerating time to close Tax and accounting structuring Internal control structure, including SarbanesOxley compliance Effect of regulatory matters on a targetcompany’s industry Identification and quantification of taxexposures and optimization of related benefits Employee benefits, information technologysystems and risk management practices Supply chain and manufacturing site inspection Benefit plan funding and liability exposuresValue ROICRiskValue driversdetermine priceand structure ofthe transaction anddefine the natureand the scope ofdue diligenceFinancialImprove/ValidateValuation Model & tionsImprove SynergyITTechnicalTaxDevelop AdditionalNegotiating LeverageHuman CapitalRisk ManagementForensic /InvestigativeServicesLegalLegalProvide Feedbackon AcquisitionAgreementsIdentify, Assess& Minimize RiskOur experience shows that it takes a well organized and executed, multidisciplinary approach to due diligence, focused on validating value propositionassumptions, understanding risks and providing actionable feedbackCopyright 2017 Deloitte Development LLC. All rights reserved.7
Due DiligenceDue Diligence objectives, activities and outputs can be segmented into three stageswithin the M&A lifecyclePhase IPhase IIM&A StrategyTarget ScreeningPhase IVPhase IIIIntegration / DivestitureDue DiligencePreliminary Due DiligenceObjectives: Identify business risks Research scouting issues and contact target Make go/no-go decisionTransaction ExecutionFinal Due DiligenceDetailed Due Diligence Analyze data room and any relevant externalinformation Feed negotiation, deal structure, valuation andintegration Make go/no-go decision Obtain signed Definitive AgreementsReach favorable Close terms & final pricingOrganize for integrationContinuously improve due diligence processCollect any outstanding dataAnalyze dataDevelop reps, warranties, deal structureConduct final contract analysisNegotiate definitive agreementsReach final termsExecute closing agreementsGeneralActivities: Identify core team and specialistsCollect external dataReview Offering Memorandum if applicableAnalyze all relevant dataDevelop business caseProduce initial valuationSeek management approval Identify due diligence teamsHire outside expertsCollect external dataPrepare for site visitsConduct site visits & conduct analysisRefine valuationDevelop deal structureSeek management approvalIdentify integration manager Outputs: Preliminary valuationBusiness caseDefined due diligence team and planInitial term sheet (proactive process)Preliminary non-binding indication ofinterest (auction process) Refined valuationDue diligence reportsProposal for BOD/EMTPreferred deal structureSubmission of final bid/term sheet Completed deal structure/closing Due diligence process review Integration planCopyright 2017 Deloitte Development LLC. All rights reserved.8
The Importance of IntegratedDue Diligence
The Deal Team Lead Defines the Process and Manages the Transaction LifecycleProject OversightRoles and Responsibilities Establish strategic objectives, priorities and project governanceExecutive Sponsor Set direction for roadmap, and timingProject Management Office (PMO)Dedicated PMO/Deal Team Leader Understands business issues and impact to the transaction Coordinates activities and dependencies across work streams Identifies and addresses resource needs/gapsTypical Areas of Focus Resolves major issues and proactively manages risksAccounting andFinancial DueDiligenceCommercial andOperationalDiligenceExecutiveAlignment andReportingTax DiligenceIT DiligenceHuman onsDay 1 ReadinessCopyright 2017 Deloitte Development LLC. All rights reserved. Rapidly resolve escalated issues Identifies major decisions and communications Interfaces with broader integration teams Enables executive visibility through effective tracking and reportingmechanisms10
Illustrative Functional ResponsibilitiesPreliminary Due DiligenceBusinessDevelopment Develop preliminary acquisition businesscase Solicit approval from Executive ion Planning & ExecutionDeal Closing Finalize negotiated Definitive Agreement Compile due diligence reports from functions Develop detailed financial model Confirm closing working capital andbalance sheet adjustments Prepare for close with Legal Carry out hand-off to Integration Participate in due diligence meetings andreview issue log Gather deal-model input on synergyopportunities and integration costs Finalize approach and timeline Conduct planning kick-off Prepare for Day 1 / integration Identify significant concentration risk andany logistical issues Consider direct procurement Consider contractual commitments Review pricing strategies, elasticity Review customer creditworthiness, paymentterms, length of relationship Review intercompany sales Identify customer relationship ownersand retention strategy Create customer communication plan Identify cross-selling opportunities Conduct site visits Assess production performance Outline operations & maintenancerequirements Define capex requirements Identify technical and intellectual capitalpotential Identify significant property & engineeringliabilities Assess operations & maintenance performance Highlight risk mitigation activities formaintaining operations Plan for near-term integration Identify opportunities for integratingtechnical capabilities Identify critical resource retentionneeds Conduct asset rationalization Conduct spend analysis Conduct inventory analysis Carry out contracts assessment Confirm vendor/supplier strategy Confirm procurement processesharmonization strategyIntegrationLead/TeamCommercialDetailedDue DiligenceProcurementCopyright 2017 Deloitte Development LLC. All rights reserved.11
Illustrative Functional ResponsibilitiesPreliminary Due DiligenceDetailedDue DiligenceIntegration Planning & ExecutionDeal Closing Conduct EBITDA normalization Conduct preliminary valuation Identify potential funding sources Review quality of earnings Set definitive agreement working capital target Obtain lenders Control of cash upon Day 1 Readiness to conduct first consolidatedfinancial close Identify preliminary tax structure Identify cash flow impact of tax issues Define tax structure Identify tax liabilities Estimate transaction taxes Ensure legal entity readiness Provide tax input to first close Give tax input to payroll readinessHR Highlight executive organization and goldenparachute implications Identify significant union, severance orpension liabilities Define all HR related liabilities Highlight similarities/differences in total comp,titles, perks Develop org charts & headcount Review processes, outsource providers Harmonize HR policies, benefits,compensation leveling Develop retention strategy Provide input on key communicationneedsLegal (Incl.Environmental) Legal due diligence Anti-trust diligence Draft and execute Definitive Agreement Provide guidance on info that can beshared between companies Edit and review communications Implement “Clean Team”, if applicable Conduct insurance due diligence Conduct FCPA diligence Regulatory diligence Harmonize risk management policies,practices, people, processesFinance/TreasuryTaxRiskmanagementIdentify significant litigation claimsAssess non-compete clausesDraft term sheetHighlight environmental liabilities Assess target profile and risk focus areasCopyright 2017 Deloitte Development LLC. All rights reserved.12
Illustrative Cross-Functional ResponsibilitiesPreliminary Due DiligenceCommunications & ChangeManagement Be aware of deal so to anticipate futurecommunication needs Lead: HR/CommsOrganizationDesignSynergyCapture Identify major sources of synergy (expensereductions, new revenue) Lead: Business DevelopmentDay 1ReadinessCopyright 2017 Deloitte Development LLC. All rights reserved.DetailedDue DiligenceIntegration Planning & ExecutionDeal Closing Begin planning for public announcement Produce press release Provide input on deal primer to integrationteams Identify change or cultural integration risks(preliminary) Lead: HR/Comms Outline organization integration considerations Identify critical executive/staff retention needs(preliminary) Lead: HR Outline options & timing for combiningorg structures Determine org structureimplementation plan Lead: HR Provide deal-model input on synergyopportunities and costs to achieve Develop preliminary synergy targets Lead: Business Development Lead “bottom-up” synergy validationacross teams Drive creation of synergy work-plans,accountabilities & metrics Prepare synergy realization trackingtool Lead: Finance Conduct Day 1 Risk Assessment Facilitate overall Day 1 readiness Tailor Day 1 checklists Review Day 1 readiness planDevelop:Day 1 communications planDay 1 signage requirementsInternal communications (town halls,newsletters, FAQs, web) Outline cultural considerations Review training needs Lead: HR/Comms13
Accounting, Finance, TreasuryBreak Out
What is the Purpose of Financial Due Diligence?Financial due diligence is conducted to support deal decision making, negotiating, andeventually, post-announcement planning and executionPre-dealPre-AnnouncementM&AStrategyTarget ScreeningDiligence &EvaluationGather information on keyacquisition activitiesPost-AnnouncementIntegration /Separation PlanningIntegration /Separation ExecutionEnable effective duediligence outcomes Valuing the target Support “go / no-go decision” and purchase price Evaluating the strategic and financial risks of buying Identify potential deal breakers and insights into key areasof strategic and financial risk Establishing tax and financial budgeting and deal structure Developing a successful integration plan Determining target operating model for capturing value andgrowth opportunitiesCopyright 2017 Deloitte Development LLC. All rights reserved. Provide acquirer with more refined framework fornegotiations and integration efforts Support evaluation of ongoing operating and financialperformance after transaction15
Financial Diligence Focus AreaTypical focus areas of financial due diligence include the followingInvestigate Valuation Considerations Quality of earnings Identify unusual or non-recurring adjustments Significant operating and financial trends Bridging operating periodsAnalyze the Technical Application of GAAP Understand accounting implications of potential dealGain Understanding of Business, Operations, and Balance SheetzzzzzzInformed ContractNegotiation Working capital and other purchase price adjustment mechanisms Treatment of debt and other liabilities Conduct of business between signing and close Regulatory issues Representations and warranties, indemnification provisionsCopyright 2017 Deloitte Development LLC. All rights reserved.16
Deep Dive – Quality of EarningsQuality of Earnings drives Earnings Before Interest, Depreciation, and Amortization(“EBITDA”), which typically has a direct impact on deal valueWhy is itimportant?Purposes ofQuality ofEarningsAnalysis Quality of Earnings analysis identifies potential adjustments to EBITDA, which can directly affect price, financing, and othervalue considerations Other quality of earnings analyses: organic vs. acquisition growth, significant lost customers, customer concentration, FX impact Understand operating performance and cash flow, including amounts available for debt service Identify items to be considered in determining the company’s financing EBITDA and resulting leverage and interest coverageratios Identify items to be considered in determining historical EBITDA number for modeling/valuation purposes Bridging operating periods and understanding variances / drivers of change in the businessCopyright 2017 Deloitte Development LLC. All rights reserved.17
Quality of Earnings – Normalization ExampleNormalized EBITDAUS 000RevenueNet incomeDepreciation and amortizationInterest expense (income)Tax expenseReported EBITDAManagement adjustments:Noncash stock based compensation1.2.(Gain) loss on disposal of assets3.Acquisition related expenseTotal management adjustmentsManagement adjusted EBITDADiligence adjustments:4.Independent auditors unrecorded adjustments5.One-time expenses (e.g. extraordinary legal expenses, one-time projects)6.Cut-backs or deferrals of discretionary costs and expenses7.Unique revenues (e.g. large non-core transactions)8.Out of period items / reserve reversals9.Restructuring charges10.Changes in accounting policies or practicesNon-core components of “other” income including gains / (losses) or asset disposals11.12.Off-market or other non-cash compensation13.Straight-line rent14.Related party transactions15.EAC true-ups on fixed price contracts16.[Other]Total diligence adjustmentsNormalized EBITDAPro forma adjustments:17.Public company / private company costs18.Stand-alone costs19.Impact of acquisitions and divestitures20.[Other]Total pro forma adjustmentsPro Forma Normalized EBITDAOther Cash flow considerations21.Capitalized internal costs (e.g. capitalized software development costs)22.Capital expendituresCopyright 2017 Deloitte Development LLC. All rights reserved.FY15FY16 LTM 0026,000---18,50023,50026,000[ ]-[ ]-[ ]-18,50023,50026,000[ ]-[ ]-[ ]-18,50023,50026,000[ ][ ][ ][ ][ ][ ]18
Other Quality of Earnings ConsiderationsOther items that impact quality of earnings but may not be included in adjustedEBITDA include the followingFinancial ReportingProcessRevenue / GrowthAssumptions Application / consistencyof GAAP (e.g. revenuerecognition, costcapitalization) Organic vs. acquiredgrowth Internal controls Management’s estimatesand judgments (e.g.,reserve movements) Actual vs. budget or prioryear analyses Changes in revenuemodels Impact of transactions inforeign currencies Normalized run-rateanalysis Interim vs. year endaccounting methods andreporting policiesCopyright 2017 Deloitte Development LLC. All rights reserved.External FactorsCost AssumptionsCompensation ExpenseAnalysis Customers Cost structure Cash vs. non-cash Overlap, concentrationand trends Impact of incrementalcosts or cost savings Headcount analysis Subcontractors Fixed costs vs. variablecosts Pro forma impact oflosses / significantchanges in relationships Bonuses and other‘lumpy’ payments Consultants vs.employees Dependency, alternativesand related trends Terms, discounts Commitments Government regulations19
Working Capital and Cash Flow ConsiderationsThorough analysis of working capital, especially in capital intensive industries, cansignificantly impact financial due diligence Identify trends – seasona
iterative process & addressed when the acquirer takes eventual control of the target. Due Diligence. Typical Due Diligence Issues Early capture and realization of synergies from the M&A transaction Uncertainty around target management’s claims on growth Stability of customer base Accelerating time to close
RGF Due Diligence Engagement Template Terms . 1 Introduction The [Applicant] is required to submit to BIS a Due Diligence report prepared by the Due Diligence Service Provider which covers the scope of the Due Diligence work set out in Appendix 7 of the Conditional Grant Offer Letter (the "Due Diligence report"). These termsof engagement set
Section 01 - Legal Due Diligence 04 1.1 Purpose of Legal Due Diligence 05 1.2 Conclusion 1 4 Section 02 - Finance Due Diligence 1 5 2.1 Purpose of Finance Due Diligence 1 6 2.2 Conclusion 2 8 Annexure 2 9 Annexure 01 - Statement of Comprehensive Income 30 Annexure 02 - Statement of Financial Position 31
Phase 1 is concerned with the basics of due diligence with a focus on tools and techniques of due diligence analysis. Day One: The basics of due diligence in the oil and gas business The changing dynamics of the global oil and gas business The strategic relevance of due diligence in market analysis
finalizes the due diligence report - The due diligence report must seek to prov ide the most pertinent information at a gi i i i i h il b bd f ibliven point in time in the most easily absorbed form possible - It is particularly critical to relate the due diligence report to the strategic objectives of the due diligence process.
§ 1.03[1] DUE DILIGENCE 1-8 § 1.03 Benefits of the Due Diligence Investigation If not carefully conceived and managed, due diligence investiga-tions can become expensive boondoggles that never end and never lead anywhere. It should be kept in mind that process without results is useless. The due diligence investigation is all about producing .
5. Anti-bribery due diligence starts sufficiently early in the due diligence process to allow adequate due diligence to be carried out and for the findings to influence the outcome of the negotiations or stimulate further review if necessary. 6. The partners or board provide commitment and oversight to the due diligence reviews.
Loan Purchase Due Diligence Transaction Checklist (Commercial Real Estate) The length of the due diligence period. The amount the purchaser is willing to spend on due diligence. The quality of the material provided by the seller. The age of the loan. The older the loan, the more likely that the loan file information is out of date.
Due Diligence for Climate Change Impacts' from 10th September to 1st October 2020, as part of the newly established BIICL Human Rights Due Diligence Forum. Developments around mandatory human rights due diligence laws are multiplying across Europe, and increasingly include climate change impacts within their scope.
