DUE DILIGENCE

NEED FOR DUE DILIGENCE FOR

M &A
Huge investment of financial resources
Evaluation of commercial viability given high
importance
Not an insurance against a bad deal, but an
assurance
Fair judgement of the value to investor of the
potential investment, impacting his bargaining
power.
Microscopic analysis of facts as compared to
provided information.
Evaluating the effectiveness of the check system

What is Due diligence?

Due diligence is an investigation of
a business or person prior to signing
a contract, or the performance of an
act with a certainstandard of care.
It can be a legal obligation, but the
term will more commonly apply to
voluntary investigations.
Examples

Due diligence
It means the process of evaluating a prospective
business decision by getting critical and material
information about the financial, legal and various
other information about an organisation in order
to make an informed decision making.
Objectives:
Informed decision making
Systematically use of information to deliberate in
a reflexive manner on the decision at hand and
all its costs, benefits, and risks.

Background of concept of Due

Diligence
Came into common use as a result of
the United StatesSecurities Act of 1933
A defence at Section 11, referred to as
the Due Diligence defence, which
could be used bybroker-dealerswhen
accused of inadequate disclosure to
investors of material information with
respect to the purchase ofsecurities.

Background of concept of Due

Diligence
Section 11makes issuers liable for registration statements that contain
"an untrue statement of a material fact or omit to state a material fact
required...to make the statements there in no misleading." Under this
provision, a purchaser of the security can bring suit under Section 11,
even if he bought the security after the initial offering, on the secondary
markets.
As long as the purchaser can trace the purchase back to the initial
offering and is within the statute of limitations, he can sue - there is no
need to prove causation or reliance on the misstatements or omissions.
Damages are limited to the difference between the offering price and
value of the securities at the time of the lawsuit. Although the purchaser
can sue the issuer, underwriter, or subsequent seller, all defendants but
the issuer have a "due diligence" defencethat they had no grounds to
believe the statement had a misstatement or omission.

 As long as broker-dealers exercised due diligence in their

investigation into the company whoseequitythey were
selling, and disclosed to the investor what they found, they
would not be held liable for non-disclosure of information
that was not discovered in the process of that investigation.
The broker-dealer community quickly institutionalized, as a
standard practice, the conducting of due diligence
investigations of any stock offerings in which they involved
themselves. Originally the term was limited to public
offerings of equity investments, but over time it has come
to be associated with investigations of private mergers and
acquisitions as well.

Concept of Due Diligence

Due diligence is a measure of prudence, activity, or
assiduity, as is properly to be expected from, and
ordinarily exercised by, a reasonable and prudent
person under the particular circumstances; not
measured by any absolute standard but depends
on the relative facts of the special case."

In other words, to a potential acquirer, due

diligence means "making sure you get what you
think you are paying for.

Example : Software Co.

Generic information
debts,
pending and potential lawsuits,
leases, warranties,
long-term customer agreements,
employment contracts,
distribution agreements,
compensation arrangements, and so
forth.

Example : Software Co.

Specific Information
Understanding any ownership issues relative to the software. For example,
did the company really develop the
software themselves, or if they bought the technology, were the rights conveyed properly?
Does a former contract programmer have a potential claim on the technology?
Does the software depend on a library for which royalties must be paid, or for which the owner might withdraw the
rights?
Might the software infringe someone else's patents, perhaps inadvertently?
Did all employees execute confidentiality and non-compete agreements?
Were copyrights and trademarks registered properly?
Will there be any special issues in maintaining the software?
In integrating the software with the acquirer's existing products?
Will the software be made obsolete quickly by hardware, software, market or competitive changes?

Factors of due diligence

Historical financial data

Current financial data
Forecasted financial data
Business plans
Minutes of directors and management
meetings
Audit paper works
Contract with suppliers, customers and staff
Confirmation from financers, debtors

People involved in Due Diligence Process

Legal professionals
- Corporate tax, real estate, employee benefits,
insurance etc.
Financial Professionals
- CFOs, Financial Controllers, auditors, underwriters,
registrars, investment bankers, commercial banks
Operational Professionals
- Intellectual property, production , sales, marketing
efforts, human resources, and other operational issues.

Parties involved in Due

Diligence

Employees
Trade Unions
Shareholders and Creditors
Vendors
Customers
Government
Society

Due Diligence Process

Due Diligence Process - Planning

Phase
Defining Scope
Deciding Focus Area
Sustainability of business
Financials
Competition
Management team and organizational culture
Potential liabilities
Technology
Existing market and potential
Business to business fit

Due Diligence Process - Planning

Phase

Finalizing Team Structure

Defining Responsibilities
Defining Time Schedules
Communicating Information
Requirements
Finalizing Templates and Tools
Required

Due Diligence Process Data

Collection Phase

Desired precision
The nature of questions to be asked
Availability of time frame
Availability of money
Access to information providers

Due Diligence Process Data

Analysis Phase

Focus on
Organizations financial health
Its future delivery capacities
Reputation, approach to working

Due Diligence Process Data Analysis

Phase Porters 5 forces model

Due Diligence Process Data

Analysis Phase BCG Matrix

Due Diligence Process Data

Analysis Phase SWOT

Report Finalization Stage

Preparation of final report
Submission of the report to investors.
Integral part of decision making