CASE STUDY ADVENT LIMITED AND POURSHINS LIMITED DUE DILIGENCE

CASE STUDYADVENT LIMITED & POURSHINS LIMITEDDUE DILIGENCEBhakti GurungDeepa TajhyaMadhuri ThapaCase OverviewAdvent Limited (an Indian BPO) was keen on taking over Pourshins Limited (UK Company with American management) so that it could conveniently expand its operations in the UK and Europe.Advent is looking for a detailed analysis of the target, its key clients, capabilities and analysis of support functions i.e. due diligence.

rrr2What is Due Diligence?Investigation of a business or person prior to signing a contract, or an act with a certain standard of care.

Legal obligation, but more commonly apply to voluntary investigations.

What is Due Diligence?Finance- the process of research and analysis that takes place in advance of an acquisition, investment, business partnership or bank loanBanking Industry- the responsibility of bank directors and officers to act in a sensible manner in evaluating credit applicationsSecurities market- the responsibility of underwriters to explain the details of new securities to interested purchasersNeed for Due DiligenceIdentify the Strengths and weaknesses of the businessTo give a fair value of the investmentHelps in identifying the apparent irregularitiesTool of ensuring that the prevailing system of checks works

Transactions requiring due diligenceMergers and acquisitionsPartnershipJoint ventures and collaborationsActivities Involved in Due DiligenceFinancial Statements: Review and confirm the existence of assets, liabilities, and equity in the balance sheet to determine the financial health of the company based on the income statement. Management and Operations review: Determine quality and reliability of financial statements to gain a sense of contingencies beyond the financial statements. Legal Compliance Review: Check the potential future legal problems stemming from the target's past. Document and Transaction review: Ensure paperwork of the deal is in order and that the structure of the transaction is appropriate.

Steps in Due Diligence Process

Planning PhaseDefining the scope: Establishing and prioritizing clear objectives, studying the availability of resources and defining the areas on which the team has to focusDeciding the focus areas: sustainability, financial, market, competition, technology, management team etcFinalizing the team structure: members should be chosen based on their skills and background so that the project is successful.Clear definition of responsibilitiesDefining time schedules of each key stepTimely communication of information requirements

Data Collection PhaseInvolves collecting existing business process data, key products, critical to quality services. Information sources: Internet, Regulatory organizations and databases, Competitors, Vendors, Customers ,Industry associations and Chambers of commerceMeeting with company management Interview with key customers and suppliersSite Visits, surveys

Data Analysis PhaseInvolves analysis of the collected data and arriving at a conclusion based on critical factors the team may uncover some issues that lead to a favorable impression of the organization and others that cause concernWeighing of a variety of factors 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.Report Finalization PhaseFormalize finding into final presentation and final deliverablesThe 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 reportingShould reflect a fair and independent analysis and evaluation of financial and commercial informationShould ensure collection, analysis and interpretation of financial, commercial and tax information in detailShould provide properly reviewed and analysed financial information to bidders and various stakeholdersShould also provide a feedback on auditing of the special purpose accounts

Information needed for Due DiligenceHistorical Financial DataCurrent Financial DataForecasted Financial InformationBusiness PlansMinutes of Directors Meetings and Management MeetingsAudit Paper Work FilesContracts with Suppliers, Customers and StaffConfirmation/ Representations from Financiers, Debtors, etc.

Due Diligence ReportFive aspects are needed for preparation of reportMen- Personnel(employees, BOD, promoters, influencers)Machine- Products, technology and technical aspectsMarket-Product market analysisMarketing- sales, promotion, partners, alliances, strategy.Money- Financial status.Types of Due diligenceFinancial Due Diligence:Involves evaluating a companys historical, current, and prospective operating results as disclosed in its historical, current and projected financial statements, tax returns, and other information .Helps in getting a sense of future revenuesEvaluates the underlying assumptions used

Revenue of Pourshins2007-2008: $250 million2008-2009: $325 millionRevenue and volume growth of the target companys clients is providedGrowth rate of BPO- 9%High growth opportunitiesUnable to forecast then future financial health because of the insufficient data- debt obligations, current assets, fixed assets

30% revenue growthTypes of Due diligenceLegal Due Diligence:Examination of all, or specific parts, of the legal affairs of the target company with a view of uncovering any legal risks and provide the buyer with an extensive insight into the companys legal mattersImproves the buyers bargaining position and ensures that necessary precautions in relation to the transaction are taken

Rules governing M&A in the U.K. are determined by the Takeover Panel, whose approximately 35 members include bankers, lawyers and other industry players.Companies has 28 days to make a binding offer, or walk away for six months.The put-up-or-shut-up rule requires a bidder to make a formal offer for a target within 28 days after its intentions become public.

Besides takeover rules, legal due diligence involves knowing about different contracts relating to the company as IT, Intellectual property rights, employment law, company law, data protection law, minutes and consents of BOD, .19Types of Due diligenceOperational Due Diligence:Involves the on-site analyses of the target business daily processes and of how the business operates.Analysis includes an evaluation of the key employees, managers, independent contractors, suppliers and other factors necessary for the business to conduct normal operationsInvolves gathering information on:New product or service creation Markets Competition Sales TargetsPeople/Organizational matters

Altogether 9 clients, 5 clients in financial services, two clients in healthcare and two clients in insurance. Advent whether has similar clients or not . And thus can take synergistic benefits from the takeover. American mgt in Pourshins whereas Indian company cultures are different.20Types of due diligenceIntellectual Property Due Diligence:Through analysis needed in this area as economies are increasingly becoming technology drivenprocess of identifying all intellectual property assets, verifying ownership and ensuring that such assets are free of encumbrances for the intended business use is fundamental to any merger, acquisition or investmentTypes of due diligenceIT Due DiligenceInvolves scrutiny of IT systems and processes in use and ascertaining better ways of deriving value and leverage from IT assetsInvolves: Sending an IT request list to the acquired company Compiling an onsite discovery process outline Conducting a review of the requested materials Scheduling and coordinating the onsite visit

Types of due diligenceHuman Resource Due Diligence:Involves valuing the contribution of HR Establishing a link between organizational objectives and the HR function Determining HR's influence on the skills and motivation of the workforce Determining the managers views of the HR function Ascertaining the outcomes produced by the HR deliverables Measuring the adequacy of HR measures, metrics and benchmarks Ascertaining the total cost of the HR function and industry comparisons Ascertaining the HR team structure, skills and motivation.

Employee initially 150 but later 175 that looks over all clients in Europe and the UK23Why due diligence fails?Failure to Focus on Key Issues Failure to Identify New Opportunities and Risks Failure to Allocate Adequate/ Right Resources