Financial_Due_Diligence

OBJECTIVES OF THE PROJECT The objectives of the project are: 1. To understand the various steps involved in M & A’s. 2. To understand the step which is critical in nature in M&A and to understand the working of the same. 3. To understand the various steps involved in due diligence. 4. To gain knowledge about the various factors that would affect the business of the target company. 5. To understand the methodology of conducting a due diligence and hence having knowledge of the step-to-step review that is required in conducting a due diligence. DUE DILIGENCE- AN INTRODUCTION 2.1 Meaning of due diligence In lay terms, Due diligence is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party or himself. The term "Due diligence" is used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. In finance, due diligence is the process of research and analysis that takes place in advance of an acquisition, investment, business partnership or bank loan in order to determine the value of the subject of the due diligence or whether there are any "skeletons in the closet". In the banking industry it refers to the responsibility of bank directors and officers to act in a prudent manner in evaluating credit applications. In the securities market, it refers to the responsibility of underwriters to explain the details of new securities to interested purchasers. Thus, Due diligence involves investigation and evaluation of a management team's characteristics, investment philosophy, and terms and conditions prior to committing capital. Due diligence is undertaken in order to determine the value of the subject of the due diligence and unearth any issues or potential issues. It is expected to provide a realistic picture of how the business is performing now, and how it is likely to perform in the future. The potential investor generally uses in-house resources or out sources the job to consultants who specialize in due diligence and corporate investigations to investigate the background and principals of the target company. The potential investor may also seek legal counsel and professional accountants to get expert advice in all areas. In addition to identifying risks and implications of an investment, due diligence may include data on a company's solvency and assets. On completion of the exercise, one should know exactly what he is getting into, what needs to be fixed, what it will cost to fix them, and if he is the right person to take on the business. While Due diligence is the responsibility one has to investigate and identify issues, due care is doing something about the findings from due diligence. 2.2 Difference from other assurance services In audit, the Chartered Accountant's objective is to provide a high (but not absolute) level of assurance on the reliability of financial statements. The auditor provides a positive opinion, which essentially states that based on the work performed; the financial statements comply with relevant accounting standards and principles. The level of testing procedures to obtain the evidence necessary to support such an opinion is high. In contrast, a review provides a negative assurance report giving only a moderate level of assurance on the reliability of the financial information. The report essentially states that nothing has come to the reviewer's attention to indicate that the financial information is not presented fairly in accordance relevant accounting standards and principles. Review engagements are designed as a limited review of financial statements; therefore the risk of mistakes, omissions or incorrect disclosures is considerably greater than with an audit. An audit engagement involves a study and evaluation of internal accounting controls, detailed tests of accounting records, or corroborative evidence -through inspection, observation and confirmation, which is not usually required in a review engagement. Due diligence goes far beyond the financial analysis. It differs from an audit in that the latter is concerned with the truth and fairness of historical financial statements only. The scope of a due diligence review is generally wider - it includes a review of historical figures as one of its elements and also involves analyzing the sustainability of business, competition, business plan, future prospects, corporate & management structure, technology, synergy of target business to company's business apart from researching regulatory compliances, legal issues and other financial data. 2.3 Need for due diligence Due diligence is necessary to limit reliance placed on vendor's warranties -it is better to discover a "skeleton in the closet" before the business is bought than afterwards. The costs of buying a business with unexpected difficulties can be disastrous. Due diligence is necessary to allow the investigating party to find out everything that he needs to know about the subject of the due diligence. The objective is to allow the investigator to consider his options in light of the facts. ' The investigator would then have the following options open: i. To withdraw from the deal - if the due diligence unearths information that makes the investment, loan or participation risky or undesirable and which cannot be adequately resolved then the investigator may withdraw from the deal. ii. To adjust the valuation of the investment - the investigator may revise his valuation of the company or reassess the price at which it will provide services. More often, the information will be adverse and therefore the valuation will go down or the price will go up, as positive information will have been made more publicly available by the target from the start. iii. To have the problem remedied - it may be possible for a problem uncovered by the due diligence to be remedied before the deal goes ahead. For example, unpaid stamp duty could be paid, company filings could be put in order or, if negative information is uncovered on a principal of the target company, the investor may put pressure on the target firm to replace that individual. This will mean that the target is put into a state that the investigator is happier with before it deals with it. 2.4 Review of information The information reviewed will include: a) Historical Financial Data b) Current Financial Data c) Forecasted Financial Information d) Business Plans e) Minutes of Directors' Meetings and Management Meetings f) Audit work paper files (if available) g) Contracts with suppliers, customers and staff h) Confirmations/representations from financiers, debtors etc However, due diligence review should not be limited to reviewing documentation. Much can be learnt about the target from discussion with the staff (formal and informal talks), and generally attending the target's premises and observing the ongoing daily activities. It is for this very reason that it is recommended that the review be conducted by high-level experienced staff. TRANSACTION REQUIRING DUE DILIGENCE 3.1 Mergers and acquisitions The term "due diligence" is synonymous with "background check" and refers to the period during which buyers make sure they have all the information they need to- proceed with the transaction. The key objective of the purchaser or acquirer from the transaction is to get something better than whatever it is that they are presently doing. The prospective purchaser tries to minimize or unveil any post settlement "surprises" and reduce uncertainties. The cost of the preparation of a quality due diligence exercise fades into insignificance when compared to the cost of a bad acquisition. So, the prospective purchaser conducts extensive due diligence. He sends a questionnaire to the target company, requesting full details of the business's financials, patents and patent applications, licenses and collaboration agreements, major systems, confidentiality agreements, employment contracts and a whole host of other information. The team doing the due diligence then reviews regulatory and press filings, media reports, etc. to find out whether there are any legal and regulatory issues, existing and pending lawsuits and other litigation involving the entity. The team may also look for conflicts of interest, insider trading and other problems. Due diligence is both for the buyer and the seller. However, it is not only the buyer who will carry out due diligence. The sale of a business will invariably include warranties given by the seller in relation to certain aspects of the business. For example, the seller will usually be asked to warrant that so far as it is aware, the activities of the business do not infringe any third-party intellectual rights, and that no third parties are infringing any of the company's rights. There will also typically be warranties relating to the company's licenses, IT systems and so on. Thus it is preferable that the seller must carry out a due diligence exercise of his own. Similarly, business Sellers might conduct their own due diligence to be assured of the ability of the buyer to complete the sale, the track record of complying with agreements etc. Specifically, they may look into: ♦ Whether the buyer has the resources to complete the sale ♦ Whether there is a past record of previous acquisitions ♦ Whether commitments made have been complied with in the past ♦ Whether Confidential and Non-Disclosure Agreements have been complied with 3.2 Partnership Before entering into partnership, the concerned parties conduct negotiations and investigation into affairs of the entities. Some of the different types of partnerships where due diligence investigations are appropriate include: Strategic Alliances, Strategic Partnerships ♦ Business Partners and Alliances, Partnering Agreements, Business Coalitions ♦ Just In Time Suppliers and Relationships, Sole Suppliers, Outsourcing Arrangements, and Customers ♦ Technology and Product Licensing, Joint Development Agreements, Technology Sharing and Cross Licensing Agreements ♦ Business Partners, Affiliates, Franchisees and Franchisers ♦ Value Added Resellers, Value Added Dealers, Distribution Relationships 3.3. Joint venture and collaborations Before entering into a major commercial agreement like a joint venture or other collaboration with a company, a collaboration partner will want to carry out a certain amount of due diligence. This is particularly likely to be the case where a large company is forming a relationship for the first time with a relatively small start-up company. The due diligence may not to be as extensive as on an acquisition, but the larger company will be seeking comfort that its investment will be secure and the small company has the systems, personnel, expertise and resources to perform its obligations. CONDUCTING DUE DILIGENCE 4.1Objectives and focus Expectations: Be clear about your expectations in terms of revenues and profits and the probability of the target company to provide you the same. Commitment: Consider whether you have resources to make the business succeed and whether you are willing to put in all the hard work which is required for any new venture Strengths: Consider whether the business gives you the opportunity to put your skills and experience to good use Business sector: Learn as much as you can about the business sector you are interested in from media reports, journals and people in the industry. 4.2. Preparation is the key! To ensure thorough and detailed investigation your preparation should begin in advance of the due diligence process. Once you have decided that you are interested in particular business prepare: ♦ Steps to be followed in due diligence process ♦ Areas to be checked ♦ Things to check in each area ♦ Information and other material to be requested from the seller 4.3 Negotiate adequate time Most sellers want the process to get over as soon as possible and try to hurry the proceedings. Do not succumb to the pressure as you are trying to understand and learn about a business - its past working and its future prospects, which will take time. Also, when the seller gives a short financial review period; consider it as red flag, which could mean that they have something to hide or some matter, which they don't want you to discover. It is in the best interest of the seller to give you adequate time so that you are certain to buy. You cannot move ahead with a deal simply because you ran out of time for due diligence. 4.4. Minimize your risk: Double-check all information - financials, tax returns, patents, copyrights and customer base, and make sure the company does not face a lawsuit or criminal investigation. The financials are very important and one needs to be certain that the target company did not engage in creative accounting. The asset position and profitability of the company are vital. However do not look solely at numbers. Since, due diligence exercise deals with the overall business, it is important to consider: ♦ the management team's past performance, roles and talent ♦ organizational strategy , business plans ♦ risk management structure ♦ technological superiority ♦ adequacy of infrastructure 4.5. Seek information from external sources: The company's customers and vendors can be quite informative. Find out from the vendors whether the target company falls in their most favored clients list. Seek out customers who were not considered by the company for doing business. 4.6. Find the best help money can buy: It is always better to hire the best consultants that your budget will allow than to make a bad decision. 4.7. Prepare to haggle: You can and should use any flaws that the audit uncovers to negotiate down the sale price. Due diligence is "a chance to get a better deal." /But don't go overboard. Remember that the whole point of buying a company is to add people to your own organization. Even if the seller and staff do not stay on after the deal, they may prove useful as advisers in the future. DUE DILIGENCE PROCESS The due diligence exercise should reduce uncertainties, confirm assumptions and define scope and prioritize issues. The exercise should combine an understanding of organization, its operations, technologies, logistics, corporate strategy and finance and then summarize complex issues into concise, easily understandable terms. The process would generally comprise of 1. Planning phase 2. Data collection phase 3. Data analysis phase 4. Report finalization phase 1. Planning phase: This stage includes the following processes: a) Defining the scope b) Deciding the focus areas c) Finalizing the team structure d) Clear definition of responsibilities e) Defining time schedules f) Timely communication of information requirements Defining the scope Prior to conducting an engagement, the due diligence team needs to learn about the specifics of the project. The due diligence team or the consultants should discuss the proposed transaction and the due diligence needs. After establishing and prioritizing clear objectives, the availability of resources should be studied and the areas on which the team has to focus on should be defined. b) Deciding the focus areas The first thing would be to decide on the focus areas which normally include: i. sustainability of the business: The team can understand the sustainability of the business by considering the target company's business plan, vision, strategic alliances, synergies, new products Hinder development, new customers, order status and backlog, customer base ii. Financials : The key financial data to be reviewed are assets, liabilities, cash flow, Inventory turnovers, accounts receivable., accounts payable, ownership structure , revenues and accounting procedures and policies iii. Competition: It is essential to understand the market environment, and the significant competitors iv. Management team and organization culture: The prevailing culture and the outlook and capability of the management team are of prime importance in taking a decision about the target company. v. Organizational Infrastructure: The organization's facilities, quality systems, personnel talent and policies should also be considered. vi. Potential liabilities: It is important to understand the potential risks and liabilities which an organization would face. The issues to be considered would include intellectual property rights, pending regulatory issues, liens, lawsuits etc. vii. Technology: It is essential to explore the technological advantage, if any, which the target company has over its competitors viii. Existing market and potential. It is important to gather Information about sales, distribution, marketing channels and promotional methods. ix. Business to business fit: If there is a good fit between the two businesses, it would create corporate synergy. The synergy might arise due to complementary strategy, personnel, financial situation etc. Finalizing the team structure Ensure that the members who form the team are specifically chosen based on their skills and background so that the project is successful. The team members should know the relevant background information on the target company, the transaction, the industry, and due diligence objectives. The members should be clear about what information should be collected, what site visits should be conducted, what analyses should be performed, and what end ^products should be delivered at the end of the project. Clear definition of responsibilities: The due diligence effort requires integration of efforts and communication with multiple parties. It is therefore important that planning is done in such a manner that responsibilities and expected outputs are clearly defined so that the team is working collectively towards a common goal. Define the expectations from all sources like target company, Internal parties, third party sources, database searches. Defining time schedules Before starting on the actual execution, it is best to define the scope, expectations and timing from each step. Scheduling the time of each key step helps achieving results in desired timeframe and helps the parties focus on the common goal. Timely communication of information requirements: The success of due diligence process depends upon complete, accurate and timely information. This can be made possible if the information providers are informed of the expectations from them and the timelines. Each party involved needs to provide information as early and specifically as possible. For example, instead of making repeated information requests, if the target company is provided detailed information request list early, they can effectively/ manage the process and meet the communication timelines. Finalize the template and tools required Based on scope, needs and objectives, the due diligence team should decide on tools to be used like internet database search, regulatory database search, questionnaires, worksheets and other communication methods like conducting interviews, emails etc. II. Data collection phase This stage involves collecting existing business process data, key products, critical to quality services. The approach used for data collection depends on a number of factors including the desired precision and "project ability" of decision inputs, the nature of questions that need to be answered, and availability of time, money and access to information providers. Information sources can be: Internet, Regulatory organizations and databases, Competitors, Vendors, Customers, Industry associations, Chambers of commerce. The research can be qualitative, conducted via in-depth interviews with information providers. The real answer to any problem is usually two or three questions deep and therefore requires a skilled interview adept at probing. The quantitative research is conducted via surveys - among a sample of customers;' information providers and the information from a sample is extrapolated to the entire population. Initial Meeting Conduct a meeting with company management. In a merger, acquisition or investment scenario, consultants meet with the target company management in order to clarify the due diligence process, the issues that should be addressed, and the meetings and site visits that need to take place. The team Makes-the initial requests for information needed, such-as business plans, forecasts, financial statements, sales and profit breakdown, market data, transportation records, customer lists, technology specifications, and supplier contacts. Meetings, Site Visits, Analysis and Communication After the initial meeting, the team conducts the rest of the process that has been specifically designed for this transaction or analysis. Interviews are conducted. For example, suppliers and customers are discreetly interviewed as to their perceptions of the company's products and services and its position alongside competitors. Collect and examine relevant information. The team works through methodologies to identify issues that may need to be brought to attention a:nd that require further investigation. Adopt a unique methodology for collecting critical and quality data by-preparing specific questionnaires and interviewing key customers and Personnel. III. Data analysis phase: This stage -involves analysis of the collected data and arriving at a conclusion based on critical factors like business criticality, functional complexity, technical complexity, Infrastructure requirements etc. In life, there are no clear-cut solutions. Similarly once the due diligence team has been through the process of rigorously examining an organization and its leadership; it will realize that there are no consistent set of findings .In reviewing due diligence findings, the team may uncover some issues that lead to a favorable impression of the organization and others that cause concern. There might be few red flags too. During the course of due diligence, the team will understand the organization’s financial health, its capacity to deliver in future, its reputation and its approach to working. The team will get a perspective on the leadership Of the organization. The analysis of due diligence findings is generally a weighing of a variety of fact ors in order to determine whether team should give a positive recommendation. All the factors need to be considered and the organization should balance them to arrive at a decision. IV. Report finalization phase One e all the interviews and site visits have been completed by the due diligence team and all of the accompanying analyses performed, formalize finding into final presentation and final deliverables. The due diligence team prepares due diligence report and presents its conclusion that becomes an integral component of the decision-making and negotiation processes. DUE DILIGENCE CONSULTANT Due diligence may be done by your house staff or can be outsourced "to a consultant having expertise in due diligence and corporate investigations. One gets the benefit of experience, expertise and objectivity when work is outsourced. A good due diligence consultant can help you make better business decisions, protect you from liability, and increase your transaction success rate. But first you have to select a firm that understands your requirements and can handle the job right. Objectives The most important thing is to make sure that first the organization defines its expectations from the process of due diligence. Once the objectives are clear it will be easier to communicate it to a prospective consultant. Size of the consulting firm The size of the consulting firm doesn't matter. You should look into experience, ability, knowledge of specific industry and technology. And then decide whether the firm's staff is dedicated and passionate about your objective. The consultant who is on the same wavelength as you and does a good job at a reasonable price is the one for you. Multi-functional expertise Try to pick a firm which has expertise in multiple fields so that they can give you the big picture and unearth inter functional issues. If you use one firm for technical due diligence, another for logistics due diligence, and yet another for financial due diligence, then they will have a very narrow field of vision and greatly Limit their ability to identify the most important issues. Consider an end-to-end provider Post-transaction integration planning starts along with due diligence exercise. Given the intimate'- knowledge that the diligence genre team gains from its work, it's a no-brainer to involve them in post-transaction integration planning, which is critical for success. Accordingly, pick a firm that not only does due diligence consulting but also can form, implement and accelerate a comprehensive post-transaction integration plan that will ensure your business goads are achieved. Be wary of conflict of interest. Certain firm s may have a conflict of interest and you should be wary of this. An accounting firm that performs due diligence consulting work, for example, may want a transaction to proceed because they will get auditing work if it does. Pick a firm I that is completely, totally and unequivocally objective. ' Avoid "Casual" due diligence consultants Some firms may profess to do due diligence consulting but it isn't something they’ve dedicated their professional lives to mastering. For example, a law firm may review contracts for you but may not have the specific industry or business knowledge to properly identify critical due diligence issues. A systems integration firm or research organization may opportunistically announce they have a due diligence practice to create a new revenue stream without ever really understanding what it takes to do due diligence well. Pick a firm that is dedicated to achieve operational excellence in the area of due diligence. Secure long term relationships with your consultant. The ultimate consulting relationship is a highly productive one, in which there are no inefficient communications between you and your consultant and there is an implicit understanding of and trust in each other. Hence, when you do find a good consultant, nurture that relationship for the long term so that the due diligence efforts are constantly excellent. Prepare for the meetings Arrange for meetings with the due diligence-consulting firms. Share your objectives with them before you meet with them. Then see how well they tailor their presentation to you. The best firms are always thinking about you, not about themselves. If they come in and generically toot their horns about themselves but never give any sign that they've researched your business and your transaction, with an eye to meeting your objectives, that's a very bad sign. If you are evaluating multiple consulting firms at the same time, inform them of their competition. They often will give you some insights on their competition. Takes those insights with a grain of salt, and give high marks to those who take the high road and don't disparage their competition. Finally, some words of wisdom on soliciting firm presentations: ♦ Provide the firms with relevant background materials. If necessary, have the terms sign a non-disclosure agreement. ♦ Be sure t»o schedule the presentations within as short a timeframe as possible so you can compare and contrast them better. ♦ Let the firms know who the decision-makers are within your organization and be sure they attend all presentations. How can you tell who will perform well for you' Getting a sense for who will deliver the goods isn't rocket science. After you've met with thee consulting firm, you get a sense for their breadth of practice areas, abilities, service levels, and professionalism. In general, you want smart people working for you. The good ones will raise issues or ideas that you haven't even thought of yet. Beyond that basic intelligence criteria, look for people with passion, who work around the clock, and who can communicate well. How formal should the evaluation be' This is a matter o«f personal preference. You may want to formally evaluate and score the consultants against a checklist or, if time is of the essence (which it usually is); you may want to go with your gut after thinking through a few key quest ions _ Do their people seem to be of high quality' Is there a good cultural fit between the two organizations' Do they impress you' Have they done good work: for other clients' Do they seem to have the right number of resources available to service you well' Making the decision Talk it through and make a decision. Avoid analysis paralysis. The longer you don't have a due diligence consulting firm up and running,: the more you risk missing out on discovering important information that could affect whether you pursue the transaction or influence negotiations. In a perfect world, when a new transaction materializes, you have the relationship in place already and start-up lead times are Close to zero. Documentation Getting the most out of your due diligence consultant often hinges on the relationship you formally draft in the agreement. It's tempting to do a one-off agreement but the record indicates that you'll get best results with a longer-term contract. That's because the due diligence firm knows you'll be with them for a while and, frankly, that means a lot to them. They'll Invest more resources and more effort if it's a long-term marriage rather than a. short-term blind date. They'll assign their best people to your account on a ^dedicated basis. Here's what we recommend: Commit to a certain number of consulting hours over the course of a year-long contract. Make sure that you get a better rate for having committed' to giving the company some guaranteed work. DOCUMENTS FOR DUE DILEGENCE | |Checked by |Reviewed by |Observations | |1 Corporate records | | | | |1.1 Certificate of Incorporation, Memorandum & Articles of | | | | |Association, including any amendments. | | | | | | | | | |1.2 Bye-Laws, operating agreements, partnership deed, | | | | |including any amendments thereto | | | | | | | | | |1.3 Minute Books, resolutions for Share | | | | |holders, Members, Board of Directors and any committees of the| | | | |above | | | | | | | | | |1.4 Scheduler of officers, directors and | | | | |committees of the Board of | | | | |Directors:" | | | | | | | | | |1.5 Stock Book and Stock Ledgers | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |Checked by |Reviewed by |Observations | |2 Shares and securities | | | | |2.1 Share holder agreements, proxies and similar agreements | | | | | | | | | |2.2 Agreements to purchase or re-purchase | | | | |any class of security | | | | | | | | | |2.3 Agreements relating too preemptive | | | | |rights for any class of: security | | | | | | | | | |2.4 As of the most current date, the following information! | | | | |(a) Number of, and record ownership of, outstanding shares | | | | |(common and preferred); | | | | |(b) Number of shares held in treasury | | | | |(c) Options, warrants and other rights outstanding, including | | | | |detail of holders, exercises, unexercised, vesting schedules, | | | | |and | | | | |(d) Ownership by officers, employees and directors. | | | | | | | | | |2.5 Stock option plans and stock option, "warrant and other | | | | |similar stock purchase agreements | | | | | | | | | |2.6 All applications for is Issuance/transfer: of securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |3. Location & property | | | | | | | | | |3.1 List of jurisdictions domestic and foreign) where the Company| | | | |is (or should be qualified) to do business. | | | | | | | | | |3.2 Schedule of locations (by address, city, state and country) | | | | |at which the Company has offices, conducts business s or stores | | | | |inventory or equipment. | | | | | | | | | |3.3 Schedule of leases and subleases for property and | | | | |facilities, including location, area, rent and lease term and | | | | |renewal options. | | | | | | | | | |3.4 Schedule of material suppliers and other third party | | | | |service providers. | | | | | | | | | |3.5 Schedule of property, key man, liability, and workers comp | | | | |insurance policies (including current and pending insurance | | | | |carrier, policy limits, deductibles, and other special | | | | |arrangements), and copies of all such insurance policies and | | | | |contracts. | | | | | | | | | |3.6 Schedule of owned property | | | | | | | | | |4 Intellectual property | | | | |4.1 Schedule of owned or proprietary technology (including | | | | |software, | | | | |databases and systems). | | | | | | | | | |4.2 Schedule and copies (if applicable) | | | | |of the following: | | | | |a) trade names, branch names, trademarks, logos and slogans; | | | | |(b) patents, patent rights, innovations and designs; | | | | |(c). copyrights; | | | | |(d) trade secrets and other industrial property rights, | | | | |including all processes, know how, technical data; and , | | | | |(f) Registrations, applications, additions, and other filings | | | | |related to the foregoing items. | | | | | | | | | |4.3 Schedule of all material ongoing planned software, Databases| | | | |and or network development projects. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |4.4 Schedule of third party intellectual | | | | |property scold, licensed or otherwise | | | | |distributed by the Company. | | | | |4.5 Product documentation and | | | | |manuals for the Company's | | | | |software, databases and networks. | | | | | | | | | |4.6 Schedule of software authors | | | | |and other creators of the Company's software products and other | | | | |intellectual property. | | | | | | | | | |4.7 The name(s), address (es) and phone number(s) of person(s) | | | | |responsible for application, maintenance and protection of | | | | |trademarks; copyrights, patents | | | | |and other intellectual property rights. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |5. Contracts & agreements | | | | |5.1 Agreements with customers and |Checked by |Reviewed by |Observations | |clients warranties and guaranties | | | | | | | | | |5.2 Consulting., development and work-for-hire agreements with, | | | | |or for and on Behalf of, customers and clients. | | | | | | | | | |5.3 Marketing agreements distributorships, sales, | | | | |representatives, franchises and | | | | |agreements. | | | | | | | | | |5.4 Agreements with employees, independent contractors or other | | | | |third parties | | | | | | | | | |5.5 Leases with respect to tangible personal properties | | | | |(including equipment) | | | | | | | | | | | | | | | | | | | |5.6 Non competition, exclusivity and non solicitation agreements,| | | | |in favor of the Company or by which the Company is bound, or by | | | | |which the Company's key | | | | |employees bi consultants may be | | | | |bounced to third parties | | | | |5.7 Confidentiality and non disclosure | | | | |agreements, in favour of the Company or by which the Company is | | | | |bound. | | | | | | | | | |5.8 Employment (including incentive and severance) agreements, | | | | |agency and | | | | |independent contractor agreements. | | | | | | | | | |5.9 Indemnification agreements for the benefit of officers-, | | | | |directors and | | | | |employees. | | | | | | | | | |5.10 Agreements or arrangements with | | | | |management, employees, shareholders and other affiliates | | | | |(including any loans or management fee arrangements), or with | | | | |which any of them have a relationship | | | | | | | | | |5.11 Outstanding agreements or comportments for capital | | | | |expenditures | | | | | | | | | |5.12 Agreements with investment bankers, brokers and similar | | | | |advisors. | | | | | | | | | |5.13 Inter company agreements | | | | | | | | | |5.14 Leases and subleases | | | | | | | | | |5.15 Contracts, or options to purchase, | | | | |sell or lease real property. | | | | | | | | | | |Checked by |Reviewed by |Observations | |5 .16 Loan agreements., lines of credit, other debt instruments,| | | | |including notes payable and guarantees (by or in favor of the | | | | |Company), and any other agreements collateralized or secured by | | | | |the assets | | | | | | | | | |5.17 Agreements relating to past, current or proposed mergers, | | | | |acquisitions or dispositions, including transactions involving | | | | |subsidiaries, divisions, product; lines and other substantial | | | | |assets. | | | | | | | | | |5 .18 Powers of Attorney | | | | | | | | | |5.19 Other material agreements to Which the Company is bound or | | | | |which are necessary for the conduct of the Company's business | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |6. Personnel and employee benefits | | | | |6 .1 Schedule of officers, directors, employees, independent | | | | |contractors and consultants, and their respective titles, | | | | |length of service, current compensation and benefits, and | | | | |contractual severance obligations. | | | | | | | | | |6.2 Schedule of employee benefit plans, including pension, | | | | |bonus, commission, profit-sharing, stock option, deferred | | | | |compensation, incentive, retirement, medical, disability, salary| | | | |continuation, executive benefit,, fringe benefit, management | | | | |perquisites or golden parachute | | | | |6.3 Policy and personnel manuals, | | | | |Including policies and -procedures with respect to vacation and | | | | |sick time, harassment and equal opportunity. | | | | | | | | | |6.4 Management perquisites or arrangements, contracts or loans | | | | |between the Company and any shareholder, officer, director, | | | | |employee or consultant or any entities or persons with which such| | | | |persons have a relationship | | | | | | | |• | | | | | | |7. Regulatory matters | | | | |7.1 Filings, registrations, reports and correspondence filed | | | | |with local, state or central regulatory agencies and any | | | | |reports issued by such agencies | | | | | | | | | |7.2 Governmental licenses,, permits, approvals and | | | | |authorizations necessary to conduct business | | | | | | | | | |7.3 Expert compliance procedures or manuals | | | | | | | | | | | | | | | | | | | | | | | | |8. Litigation and other disputes | | | | | | | | | |8.1 Schedule and details off pending or threatened litigation, | | | | |claims and other disputes. | | | | | | | | | |8.2 Schedule and details off government or regulatory | | | | |proceedings, inquiries or investigations | | | | | | | | | |8.3 Judgments, injunctions or other orders | | | | | | | | | |8.4 Settlements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |Checked by |Reviewed by |Observations | |9 General financial information | | | | |9.1 Previous (up to 3 years if available) | | | | |annual audited / unaudited financial | | | | |statements as well as interim period | | | | |(monthly/quarterly) for c:urrent year | | | | | | | | | |9.2 Current prospective financial data (i.e., budgets / | | | | |forecasts) with detail of assumptions. | | | | | | | | | |9.3 External and internal auditors' reports (annual and | | | | |quarterly), permanent files, management letters and regulatory | | | | |examination reports received/issued in the last 3 years. | | | | | | | | | |9.4 Consolidating general ledger or trial balance for detailed | | | | |accounts for the latest 2 fiscal years, current year quarters and| | | | |current period. | | | | |9.5 Schedule of prepaid expenses and | | | | |other assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | The scrutiny of the documents would involve: 1. Reading and analyzing financial information, including identifying major issues and risk areas. 2. Reading the independent auditor’s working papers and to obtain an understanding of recent audits. 3. Identify preliminary tax and accounting issues and memorandum and other available background risk areas for further consideration information (overview of the company’s history, structure and operations) 4. Inquire about the general history of current operations and recent changes in the Target’s business, including, i) Products or services, (ii) any changes in key customer or supplier relationships, ii) Changes in environment in which the company operates, markets    served, and competitive conditions, (iv) any unusual business practices inherent within the industry or the locations where the company operates, such as arrangements with labor organizations, local authorities, distributors, major customers and suppliers, etc.                                        The list needs to be scrutinized and based on the scrutiny the following analysis needs to be undertaken: 1. Operational analysis 2. Balance sheet analysis 3. Tax analysis 4. Information Technology analysis OPERATIONAL ANALYSIS Operational analysis While doing the operational Analysis, what need to be analyzed are the income statement and the related statements. While conducting any analysis related to the operations what needs to be considered is, Proposed Due diligence adjustment. There are instances where the management does not provide any adjustments to be made. In such cases the adjustments should be provided by the organization conducting the due diligence, these are referred to as the proposed due diligence adjustments. These adjustments would be proposed to the firm, i.e. the firm conducting the due diligence and hence the due diligence adjustments need to be clearly stated in the report that would be made. It is essential to unveil the adjustments made because it would help the buying company in understanding how the figures have been arrived. The adjustments that are made are generally related to: • Adding back of items like interest, depreciation and tax. • Adding back of any provisions that have been made over and above the rates specified • Adding back of any provisions that have been made by the organization itself, i.e. which are not mandatory by law. • Adding back of any other non-cash item. • Adding any amount that was not recorded related to the key employees (e.g. salary of the CFO, post vacant for the 2 months), etc • Making any adjustments related to the technological factors. Hence, after adding back of all these items, the figure arrived to would be the earnings before depreciation, interest, tax and amortization. This would give the actual earnings of the firm. Operational analysis would also involve the analysis of: • Sales and customer analysis • Other income analysis • Vendor analysis • Human resource analysis • Office, general and selling expenses analysis • Cost of sales and profitability analysis • Marketing analysis • Industry overview BALANCE SHEET OVERVIEW Balance sheet Analysis The balance sheet analysis would mean analysis of the balance sheet of the preceding years. While reviewing the balance sheet the facts that need to be looked into are as follows: • It needs to analyze all historical data for the past few years. • The analysis needs to be done to check if the assets and liabilities are valued as per the requirements. • It needs to be checked if proper depreciation has been provided and at preferable rates. • The assumptions, if any, used while preparing the balance sheet need to be discussed with the management. • The normal budgeting practices of the target should be compared and differences, if any should be inquired into. • Inquire on the accuracy of the budgets and actual achieved. • The assumptions need to be considered in accordance with the prevailing market conditions • Compare the projected results with the historical results and the actual results. However, complications may arise when the assumptions made by the target company while preparing its accounts were not accurate. The same could happen even when the assumptions are unsupported or they are not consistent with the market conditions. So, keeping such points in consideration the required adjustments need to be made for the client. All these adjustments need to be made after scrutinizing the balance sheet of the current year and then comparing it with records of past years. TAX ANALYSIS Tax analysis The tax analysis is done in order to check if the target has always been paying its tax on time and complying with the tax regulations in a disciplined manner. The tax due diligence comprises an analysis of: • Tax compliance • Tax contingencies and aggressive positions • Transfer pricing • Identification of risk areas • Tax planning and opportunities However, Tax diligence is always an important matter in deal and post-deal structuring. Tax objectives are different for buyers and sellers and hence the tax analysis needs to be done. Tax rules and norms are different for different countries. The tax rules in all the different countries have different rules and thus its implication on the other countries would vary Hence, tax diligence needs to be considered well and with great precision. The tax diligence also provides the following: • Provide inputs to support the offer and enhance the negotiation position • Identify risks and propose how to deal with them in legal agreements • Hence, tax diligence needs to be undertaken so as to helping proper decisions related to merger\acquisition\. • Tax diligence is important since it overlaps both legal and financial due diligence. INFORMATION TECHNOLOGY DILIGENCE Information Technology Diligence The IT diligence is required if while conducting the due diligence, we come across • Any complex intercompany transactions. • Any complex supply chain transactions. • Key personnel lack understanding into the inter-workings of the system. • Unable to generate common reports such as customer order history, open sales order, etc There are various business systems that would be providing support. • Enterprise resource system (ERP), • Customer resource Management (CRM), • Warehouse management (WMS), etc For conducting the IT diligence, we need to check the accuracy, the stability and the scalability of the systems in use. This can be done by, • Interviewing the key users of the system • Test the integration of the system • Changes (modifications\enhancements) that have been made in the system and its effect. • Check if the software has been leased, etc. • An understanding of the present and the future costs needs to be obtained. The systems need to be checked for the securities, the firewall, and the safety for the data. Hence, an It diligence would help, be having an understanding of the system used for the business, by the target company. DUE DILIGENCE REPORT Due Diligence report Once the due diligence is done for the client. It needs to be presented to the client. There is no pre described format for preparing a Due Diligence report but generally the due diligence report contains the following components: 1. Introduction page 2. Glossary of terms 3. Executive summary 4. Operations analysis section 5. Balance sheet analysis 6. Tax analysis (if engaged) 7. Information technology analysis (if engaged) Thus, a report of due diligence based on the given format would make it easier for both the parties to have a clear view of the scope. Hence while making a due diligence report all the above said components need to be analyzed in depth so as to help have an analysis all aspects related to the affairs of the organization. When the due diligence is done for the buyer, the analysis and interpretation of the above said components would help the buying company to analyze the working of the organization and help make decisions related to whether to not to proceed with the merger\takeover DUE DILIGENCE- THE TARGETS PERSPECTIVE Due diligence – The targets’ perspective The due diligence could also be done; by the selling company itself to analyze what the loopholes are and what are the other factors affecting the company. This due diligence can be done: 1. Voluntarily by the selling company or, 2. It could be done on the request of the buying company When it is done, the selling company can find its areas of poor performance or the areas requiring attention. The degree of attention required could also be reviewed. It would also help the selling company to find the value that it should quote as its initial bid or as its selling price. The due diligence for the seller is conducted in the same manner as it is conducted for the buyer. This is because it has the same documents, accounts, etc to be reviewed which otherwise would have been for the buying company. PROS AND CONS OF DUE DILIGENCE Benefits of Due diligence In most cases, entrepreneurs find these reports to be enlightening. This is where the true value of the due diligence exercise is realized. The results of this report may cause to conclude the deal swiftly, abandon it completely, or make some pertinent changes. It could have a bearing on the course of negotiations, causing to adjust the asking/selling price to offset a degree of risk that had not been counted on. In short, the benefits of professional due diligence are concrete. It can help protect from financial losses. It can remove the need for costly and time-consuming litigation to recover the losses. But perhaps most of all, it promotes an open and honest environment for negotiation that leads to more fruitful business dealings. Disadvantages of due diligence Due diligence could has certain drawbacks also. The due diligence report could sometimes be disapproved by the investors. The selling company may sometimes provide incomplete information, which would lead to the due diligence report being formed with incomplete information, which would be incorrect. Since, there is no standard format for creating a due diligence report, the report could sometimes be biased. What happens when effective due diligence does not take place' • Failure to achieve strategic or financial goals established • Potential to increase utilization of assets and resources not flagged up. • Opportunities for tax structuring and benefits not exploited • Failure to identify opportunities to optimize profits or reduce losses. MERGERS AND ACQUISITIONS – AN INTRODUCTION MERGERS AND ACQUISITIONS – AN INTRODUCTION Mergers and Acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. A merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. 11.1 Classifications of mergers Horizontal mergers take place where the two merging companies produce similar product in the same industry. Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine. Cogeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company. Conglomerate mergers take place when the two firms operate in different industries. Accretive mergers are those in which an acquiring company's (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E. Dilutive mergers are the opposite of above, whereby a company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E. 11.2 Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. 11.3 Motives behind mergers and acquisitions The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to add shareholder value: Synergy: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit. Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices. Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. Economies of Scale: For example, managerial economies such as the increased opportunity of managerial specialization. Another example is purchasing economies due to increased order size and associated bulk-buying discounts. Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company. Geographical or other diversification: This is designed to smoothen the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger. 11.4 Mergers from the Indian Perspective While the pace of merger and acquisitions has slowed in the United States in the wake of the recent credit crisis, India, having money to spend and a desire to expand, are continuing to pursue M&A opportunities. India is emerging as a global economic and political power. India has contributed the second-largest number of emerging market giants to BCG's 2008 top global challengers list. India contributed 45% to BCG’s international sales contribution. Mergers in India are among the most popular issues in India and there has been plenty of debate surrounding these issues. Of late, several sectors of the economy are heating up with numerous mergers and global alliances. According to a recent review, this will improve the economy of the country. According to a report, India is putting its growing economic resources to use. Indian companies have announced $22.3 billion worth of foreign acquisitions in 2007, according to data from Thomson Financial and the buying doesn't appear to be slowing down. Mergers in India have led to a massive upsurge in the Indian economy. Numerous companies in the auto sector, steel sector, cement sector, pharmaceutical sector, petrochemical sector, and many more have experienced mergers with the global companies. Among all the industrial sectors in India, these are the few sectors, which have witnessed the maximum profit brought in by globalization and mergers with global associations. Indian copper and aluminum producer Hindalco Industries paid $6 billion this year to acquire Novelis Inc., a Canadian manufacturer of semi-finished aluminum products. Indian automakers Tata Motors Ltd. and Mahindra & Mahindra are competing against each other and private equity firm one Equity Partners to buy British car brands Jaguar and Land Rover from Ford Motor Company. The car brands are expected to sell for around $1.5 billion. The value of the Indian rupee is on the rise as well, up more than ten percent against the US dollar this year. With reduced competition and increased buying power, India's corporate sector is seeing a good opportunity to pursue acquisitions. Some of the countries that seek mergers in India with the aim to enhance and trade in the sectors such as legal, informative, accounting, tax, and investment banking include Canada, Holland, Belgium, Italy, Sweden, Norway, Poland, Germany, Spain and the United Kingdom. These countries prefer to do mergers with Indian companies in some large-scale industries, which are at the peak in their country as well. The mergers and acquisitions done by the global companies in India are susceptible to continuous change in practicing the same. Globalization and mergers in India is an influential perspective of any corporate executive on every detail of mergers and acquisitions exercised around the world. The transactions in the mergers in India include governing mergers, joint ventures, acquisitions, takeovers, and other kinds of cross-border transactions. 11.5 Mergers and Acquisitions in the corporate world Mergers and Acquisitions generally take place when either the companies have a mutual understanding to merge or an acquisition to take place. The merger or acquisition could also be hostile when it happens without any mutual understanding and it takes place due to motives like earning higher profits, creating monopolies, having greater market share, etc The process of M&A would start with the negotiations between the parties in concern. It would begin with the dealing between the concerned parties and negotiations between the concerned parties, which would reflect the interest of the buying company to either merge or takeover the selling company. Once they decide whether to or not to merge they would want to have a due diligence done which would help in finding details of the working or the affairs of the firm. It would also help the buying company to find out if the firm is worth buying or not. The due diligence could also be done from them seller’s point of view to analyze the vendor company. For the seller, due diligence helps determine any obstacles that could delay reaching a definitive purchase agreement and timely closing. For example, the process may turn up additional information the seller must disclose. Due diligence can also help a seller strengthen its negotiating position by establishing an appropriate value and prepare the business for ownership transition. After successful due diligence, the next step is to evaluate the business. Business valuation can be done either before the due diligence or after the due diligence. The five most common ways to evaluate a business are 1. Asset valuation, 2. Historical earnings valuation, 3. Future maintainable earnings valuation, 4. Relative valuation (comparable company & comparable transactions), 5. Discounted cash flow (DCF) valuation Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. These values are determined for the most part by looking at a company's balance sheet and/or income statement and withdrawing the appropriate information. KPMG - AN INTRODUCTION KPMG operates as an international network of member firms offering audit, tax and advisory services. They work closely with their clients, helping them to mitigate risks and grasp opportunities. Their firms’ clients include business corporations, governments and public sector agencies and not-for-profit organizations. They look to KPMG for a consistent standard of service based on high order professional capabilities, industry insight and local knowledge. KPMG member firms can be found in over 140 countries. Collectively they employ more than 135,000 people across a range of disciplines. Sustaining and enhancing the quality of this professional workforce is KPMG’s primary objective. Wherever they operate they want their firms to be no less than the professional employers of choice.  Their people embrace KPMG’s values. These values determine how they interact with clients, with each other and with the world around them. The clients define what the KPMG stand for and how they do things.  They contribute to the effective functioning of international capital markets. They support reforms that strengthen the markets’ credibility and their social responsibility. They believe that similar reform must extend to the professional realm.  At KPMG they try to create sustainable, long-term economic growth, not just for their member firms and their clients but for the broader society, too. They seek to be a good corporate citizen, making a real difference to the communities in which they operate. KPMG- VALUES: Our values help us to work together in the most effective and fulfilling way. They bring us closer as a global organization. • We lead by example: At all levels we act in a way that exemplifies what we expect of each other and our member firms' clients. • We work together: We bring out the best in each other and create strong and successful working relationships. • We respect the individual: We respect people for who they are and for their knowledge, skills and experience as individuals and team members. • We seek the facts and provide insight: By challenging assumptions and pursuing facts, we strengthen our reputation as trusted and objective business advisers. • We are open and honest in our communication: We share information, insight and advice frequently and constructively and managing tough situations with courage and candor. • We are committed to our communities We act as responsible corporate citizens by broadening our skills, experience and perspectives through work in our communities. • Above all, we act with integrity We are constantly striving to uphold the highest professional standards, provide sound advice and rigorously maintain our independence.  Our values are at the heart of our Global Code of Conduct, which defines the standards of ethical conduct we require of people in KPMG member firms worldwide.   KPMG – SERVICES Audit: KPMG member firms can provide independent audit services designed to enhance the reliability of information prepared by clients for use by investors, creditors and other stakeholders, including country-specific statutory requirements. Audit services also include a range of other forms of attestation reports. • Attestation services • Financial Statement Audit Tax: Attitudes to tax are changing. Organizations of all sizes are ever more exposed to new trends in tax regulation, not just locally but globally. By thinking beyond the present and beyond borders to deliver long-lasting value, our member firms’ understanding of tax governance, specialist skills and deep industry knowledge help you to stay competitive and compliant. • Global Indirect Tax • Global Tax Outsourcing • Global Transfer Pricing Services • International Corporate Tax • International Executive Services • Mergers and Acquisition: KPMG’s Mergers & Acquisitions (M&A) Tax practice is a part of a network of professionals which combines global understanding and deal experience with local knowledge of tax jurisdictions. We help businesses with cross-border M&A and other transactions. KPMG offers a range of M&A tax services to corporate and private equity investors covering all phases of domestic and cross-border transactions. Their services include: • tax due diligence • structuring an acquisition or disposition • tax modeling • vendor assistance • Post-deal integration.  Why tax-efficient mergers and acquisitions matter: Companies with global ambitions cannot afford to ignore the opportunities for profitable growth offered by mergers, acquisitions and disposals. But if these transactions are to create real value, it is important that the tax implications of each deal are dealt with from the outset. This is especially important in cross-border deals, where differing regulations and business cultures need to be reconciled in order to reveal the risks and opportunities of a transaction. Similarly, private equity seeking to increase return on investment cannot afford to ignore tax. Recent trends show that M&A transactions have become more international and deal volumes have increased tremendously. Highly-leveraged transactions allow for big ticket deals, in particular within the private equity market. Understanding how a deal is done: In a highly professional and competitive deal environment, many transactions are organized as structured auctions. Only the strongest bidder will win. When strategic investors compete with private equity for the few attractive targets offered, understanding how a deal is done becomes crucially significant. To assess the real value of a transaction you need to understand the historical tax risks associated with an enterprise for sale. To win an auction, you also need to evaluate and quantify upside potential. In many cases, tax can make a difference.  Getting the timing right: Running an M&A process means coordinating many different work-streams within a very strict timeline. In the auction processes, there is little flexibility surrounding bid deadlines. Deadlines are short to keep management attention to an acceptable minimum. Valuable time can be lost just trying to organize your deal team. Tax due diligence, international acquisition structuring and modeling tax in the acquisition target's business forecast should be addressed immediately. Why choose KPMG' As KPMG is a part of a global M&A Tax network, their member firms' clients have access to dedicated tax professionals who understand how tax affects transactions across the world. With a strong focus on transactions with a private equity background, they are commercially minded and deal hardened, they know how to identify and advise on the material tax exposures in a transaction and to develop deal structures that appropriately address the tax implications. Working on transactions day-by-day, they are process-driven and understand the mechanics of acquisition and disposals in a competitive environment.  Professionals from across their global network keep in regular contact with each other, with their member firms’ clients and with the tax authorities. They therefore understand the practical impact of tax developments from one country to the next. They can spot opportunities and they know how to act on them to benefit their member firms’ clients and their stakeholders. KPMG INDIA: Mergers and Acquisitions: The India growth story has seen a transition in recent times, from being recognized as a destination of outsourcing and foreign investment to being a dominant player in the already red-hot market for M&A in the global arena. An aspiration for continued growth is one of the imperatives behind the Indian globalization, which could be realized by acquisitions or alliances. KPMG Corporate Finance's hands-on practical approaches helps facilitate achieve successful transactions. They assist companies in the entire transaction process. Their work includes: ▪ Identification of the business to be acquired ▪ Strategic planning of the acquisition ▪ Researching and identifying key targets locally and internationally ▪ Valuations ▪ Transaction structuring, tactics and negotiation ▪ Advice on financing, be it debt, equity or other more complex instruments ▪ Supervising due diligence, legal and other issues to work towards successful completion KPMG’s key success factors have been our in-depth industry knowledge (through sectoral teams) and the ability to effectively coordinate KPMG's other services for the client. Takeovers and mergers / de-mergers: For a bidding party, KPMG would cover the strategy, tactics and the formal approach on the client's behalf. They could source and arrange the funding (if required), and assist in reviewing the documentation. KPMG can act as the financial advisor for the total transaction whether the client is the bidder or the target. MERGER AND ACQUISITION CASE STUDY: Mergers & Acquisitions (M&A) tax practice’s large global network of professionals was able to assist two private equity funds, which own a portfolio entity as a co-investment (club deal), develop a tax structure for a buyback of debt owed by a portfolio entity. The team of 50 KPMG member firm tax professionals from 15 different countries all had a full understanding of how tax affects transactions across the world and were therefore successfully able to spot the opportunities and pitfalls, as well as develop an appropriate investment structure that accommodated the structuring needs identified. Introduction: International mergers, acquisitions, and disposals offered great opportunities for profitable growth in recent years. Favorable financing conditions offered by lenders resulted in significant leverage in such acquisitions (see previous Global Mergers & Acquisitions Tax case study). Acquisition debt was commonly syndicated and often the debt of a single leveraged buyout transaction (LBO) is now owed to hundreds of lenders. The sub-prime debt crisis which started in mid-2007 and the resulting financial turmoil resulted in lending institutions selling their loan receivables in the market at a discount. Initially, distressed situations were traded in the market among financial institutions and hedge funds. But today, even performing LBO financing is traded at discount in the credit market. This situation offers the opportunity for investors to acquire LBO financing granted to their portfolio investments or other borrowers at a discount in the market.   The rationale of such an investment could be to obtain a stream of interest payments calculated on the higher face value and to make a profit on the sale or redemption of the financing in the future. In other cases, the focus is rather to deleverage portfolio entities by their current owners to secure their economic stability in challenging times. These transactions can only create the best possible value if the tax implications are dealt with by the parties involved from the very outset. This is particularly true for private equity funds since the tried and tested investment structures are commonly designed for equity investments rather than debt investments. In most private equity funds investors from different jurisdictions come together and, as a result, different regulations and business cultures. This requires a team that is able to accommodate tax issues on a global basis —mitigating on the risk of tax miscalculations and misunderstandings inherent in such projects. Issue: The Mergers & Acquisitions Tax (M&A Tax) practice is a part of a worldwide network of professionals from KPMG member firms. Here, M&A Tax was contracted by two private equity funds which own a portfolio entity as a co-investment (club deal). M&A Tax was asked to develop a tax structure for a buyback of debt owed by a portfolio entity.  The focus of the deal was to seize the opportunity offered by the acquisition of debt at a discount, given the solid performance of the portfolio entity. Careful tax structuring of the investment vehicle used was key to avoid tax leakage for the investors to the funds, which could arise from the new investment focus on debt instruments. The tough timeline for implementation owed to volatile debt markets as well as structuring constraints triggered by the facilities agreement in place provided additional challenges for everyone involved. Our approach: The emphasis of the work carried out by M&A Tax from the outset was on the potential tax structure of the deal. Driven by a challenging timeline, we established an international client service team including more than 50 dedicated M&A Tax professionals from KPMG member firms in more than 15 countries.  In many jurisdictions, tax rules provide for income recognition at the level of the investors, even if there is no distribution of earnings to the investor. Such taxable income triggers cash tax payments at the level of the investor without receiving cash to cover this exposure, referred to as dry income. Testing various structuring alternatives for potential tax impacts on the investors to the funds, the investment vehicles and also the portfolio entity owing the debt, was the main focus of the work and allowed our team to identify and select the most beneficial combination fast, thereby allowing our clients prompt implementation and execution of the deal.  Information needed for the structuring, such as the underlying investor base, was collected early in the process. Due to the highly confidential nature of the investor base, KPMG served also as a black box to shelter such confidential information from insight by different private equity funds involved as co-investors. KPMG developed an anonymous sample for an analysis of the potential tax implications in the jurisdictions where the investors reside, covering more than 80 percent of the investor base.  The professionals of M&A Tax involved were able to make a valuable contribution to the overall success of the transaction because they understand how tax affects transactions across the world, were able to spot the opportunities and pitfalls and to develop an appropriate investment structure that accommodated the structuring needs identified.  Outcome: The multinational team of M&A Tax delivered value that allowed the client’s prompt execution to seize the opportunity and avoid detrimental tax effects, such as tax leakage and dry income issues, for the investors. Bibliography Websites: www.wikipedia.com www.investopedia.com www.business.mapofindia.com www.Astutediligence.com www.duediligencelist.com www.bizop.ca www.reportbuyer.com www.amanet.com www.1000venture.com www.Managementlogs.com www.kpmg.com www.in.kpmg.com www.duediligence.net Books: Due diligence by Due diligence – McGrawhill Due Diligence –Pearson Education Mergers and Acquisitions –Pearson Education The Art of Mergers and Acquisitions - McGraw hill Corporate Finance – Mckinsey and company ----------------------- 82