Due Diligence: An M&A Value Creation Approach

Preface xiii

Step-by-Step Guidance xiii

Organization xiv

Planning xv

Investigation xvi

Execution xvii

About the Authors xix

Part One Planning 1

Chapter 1 Introduction 3

Overview 3

Mergers and Acquisitions: A Way of Corporate Life 3

Mixed Results 6

Acquisition Risk and Due Diligence 7

Preventable Causes of Failure 10

Myopic Approach to Due Diligence 11

Reacting to Deals 11

Compartmentalized Behavior 13

Inactionable Findings 13

Exclusive Focus on Risk Mitigation 14

Key Success Factors 14

Holistic View of Due Diligence 14

Growth Strategy 15

Integrated Management 15

Purposeful Action 16

Value Orientation 16

Due Diligence and Value Creation 16

Plan to Create Value 16

Strategic Purpose 17

Value Drivers 20

Key Risks 23

Purposeful Behavior 24

Key Points 25

Chapter 2 Planning for Value Creation: Growth Strategy 27

Introduction 27

Central Role of Strategic Planning 27

Chapter Focus 28

The Strategic Planning Process 29

Managing the Process 30

Characteristics of an Effective Planning Process 31

Process Overview 32

Strategic Assessment 32

Market Targeting Process 33

Investment Objectives 34

Market Expansion 35

Vertical Integration 37

Infrastructure Improvement 38

Investment Alternatives 38

Characteristics of Investment Types 39

Backup Planning 45

Plan Outputs 46

Conclusion 51

Key Points 51

Chapter 3 Implementing the Growth Strategy 53

From Identification to Pursuit 53

Choosing an Acquisition Strategy 53

Winnowing Process 54

Identification 58

Marketplace for Acquisitions 58

Identifying Prospects 59

Qualification 64

Strategic Fit 64

Availability 66

Engagement 67

Proactive Engagement 68

Role of Management versus Intermediaries 70

Confidentiality of Information: Nondisclosure Agreement (NDA) 70

Reactive Engagement 71

Assessment 73

Notification/Approval Document 73

Plan to Create Value 76

Pursuit 78

Transaction Framework: Sellers’ and Acquirers’ Different Perspectives 79

Taking Action: Assembling the Core Acquisition Team 81

Key Points 83

Part Two Investigation 85

Chapter 4 Preparing for Due Diligence 87

Introduction 87

Due Diligence Reviews 88

Chapter Focus 89

Environmental Factors 90

External Constraints of the Sale Process 90

Internal Limitations of the Acquirer 92

Nature of the Target Company 92

Impact of Environmental Factors on the Review 93

Creation of the Due Diligence Team 93

Introduction 93

Composition of the Due Diligence Team 94

A Caveat 97

Other Considerations 97

Initial Preparation Measures 98

Development of the Due Diligence Program 99

Program Development Process 99

Key Aspects of the Due Diligence Program 100

Objectives, Procedures and Findings, and Recommendations Illustrated 103

A Due Diligence Mind-Set 105

Planning Due Diligence 106

Finalize the Program 106

Mechanisms for Team Coordination 107

Resolve Issues of Overlap 107

Maintain an Aggressive Posture 107

Communicate Logistical Information 108

Communicate Responsibility and Timing of Report Submissions 108

Key Points 108

Appendix 4A: Due Diligence Checklist 109

I. Review Company Background and Organization and Proposed Transaction 109

II. Financial 112

III. Technology 114

IV. Products 115

V. Marketing and Sales 116

VI. Legal 116

VII. Insurance 119

VIII. Human Resources 119

Chapter 5 Conducting the Due Diligence Review 125

Introduction 125

Overview of Transaction Types 125

Auctions 126

Auctions: The Buyer’s Perspective 127

Preemptive Bids 128

Purchase Premium Preemption 129

Price Preemption: The Buyer’s Perspective 129

Relationship-Based Preemption 130

Relationship-Based Preemption: The Buyer’s Perspective 130

Summary of Transaction Characteristics 131

Components of the Due Diligence Review 131

Management Presentations 132

Management Team Interviews 134

Document Review 135

Tour of the Facilities 136

Technology Trade-Offs 137

Due Diligence Reviews: An Objectives-Driven Approach 138

Overview 138

Due Diligence Objectives 139

Integration 140

Assessment by Function 141

Finance and Accounting 142

Human Resources 145

Sales and Marketing 148

Research and Development 150

Information Technology Review 151

Operations/Production Review 152

Legal and Insurance Review 153

Cross-Functional Coordination and Analysis 154

Conclusion 159

Key Points 159

Appendix 5A: Illustrative Final Process Letter Outline 160

Invitation 160

Description of Transaction Process 160

Guidelines for Final Offers 161

Appendix 5B: Illustrative Data Room Information Listing 161

Chapter 6 Reporting on Due Diligence: Deliverables and Decisions 165

Introduction 165

Outcomes of the Due Diligence Review 165

The Importance of Backup Planning 166

Elimination in the Auction Process 167

Outputs/Reports 168

The No-Go Decision 170

No-Go Discoveries 171

Strategic Issues 171

Valuation Issues 172

Risk Issues 173

Outputs/Reports 175

Renegotiations of Major Terms 175

Outputs/Reports 178

Decision to Proceed 179

Outputs/Reports 179

Comprehensive Due Diligence Report 180

Summary Due Diligence Report 180

Corporate Approval Document 182

Integration Plan 186

Contingency Plan 188

Key Points 188

Part Three Execution 191

Chapter 7 Optimizing Value: Translating Due Diligence Findings into Action 193

Acting on Due Diligence Findings 193

Preacquisition vs. Postacquisition Issues 193

Revisiting the Valuation and Purchase Price 195

Reviewing the Acquisition Transaction Structure 199

Contingent Purchase Price 199

Acquiring Assets vs. Stock 200

Sharing Risk: Contractual Terms and Conditions 202

Marking Up the Draft Purchase Agreement 202

Contract Drafting and Revision 202

Key Sections of the Purchase Agreement 203

Purchase and Sale 203

Closing 205

Representations and Warranties of the Seller 206

Representations and Warranties of the Buyer 208

Covenants 208

Employment Matters 209

Conditions to Close 210

Termination 211

Indemnification 211

Tax Matters 212

General Provisions 212

Disclosure Schedules 213

Transition Services Agreement 213

Managing Contract Negotiations 215

Effective and Efficient Negotiations 215

Empowered Leadership 215

Support of Legal Counsel 216

Support by Experts 217

Review and Feedback 218

Commitment to Getting the Deal Done 220

Closing 220

Shepherding the Transaction toward Closing 220

Regulatory Approval 221

Hart-Scott-Rodino (HSR) Act 221

Buyer Financing 224

Third-Party Consents 224

Closing the Transaction 224

Key Points 225

Chapter 8 Integration: Extracting Value and Mitigating Risk 227

Dual Focus of the Integration Effort 227

Extracting Value 228

Mitigating Risk 229

Integration Team 231

Early Formation 231

Leadership 232

Structure and Composition 233

Integration Plan 234

Plan Components 234

First 90 Days vs. Longer Term 238

Management of the Integration Process 239

Communication 239

Reporting and Decision Making 242

Contingency Plan 245

Broader View of Risks 245

Plan Components 245

Human Factors 247

Culture 247

Knowledge Transfer 249

Recommendations for Postacquisition Management 250

Key Points 251

Appendix What is the Premerger Notification Program: An Overview 253

Index 275