Due diligence slides

Strictly Private & Confidential

Discussion Paper

Due Diligence Process

April 2009

M&A

Strategic Advisory Division

The information provided in this document is for your reference only and the accuracy and completeness of this information cannot be guaranteed or assured. The contents herein are therefore relied upon at

your company’s own risk. This document has not been prepared for the purpose of investment solicitation, and Daiwa Securities Capital Markets Co. Ltd. (“Daiwa”) does not solicit any investment in securities

from your company at the time of submitting this document. In determining a transaction, such as an investment in share certificates or other securities, your company should make such determination at your

company’s own responsibility based upon a deliberation of relevant materials conducted by your company and the results of due diligence, etc.

All rights in connection with the contents of this document shall belong to Daiwa, and no part of this document shall be disclosed to the public or transmitted to any third party without Daiwa SMBC’s consent;

accordingly, please treat this document as strictly for your company’s own use.


Disclaimer

The information and opinions in this document were

prepared by Daiwa Securities Capital Markets Co. Ltd.

(“Daiwa “) and/or its affiliates.

The information herein and the sources of the information

are believed by Daiwa to be reliable, but Daiwa makes

no representation and/or warranty as to the accuracy or

completeness of such information.

Any use, disclosure, distribution, dissemination, copying,

or reproduction of this document without prior written

consent or approval from Daiwa is strictly prohibited.








2

Process Flow for the Transaction

Board approvals

Signing of AgreementsSigning of the Agreements

Prior to Closing, the Investor will verify that (1) the representations and warranties are

true and accurate; (2) conditions precedent and pre-closing obligations are fulfilled;

(3) closing conditions are satisfied.

Closing

The counterparty will provide the markup of the Agreements.

Based on the markups, both parties will enter into a negotiation (eg price, key

provisions such as conditions precedent, warranties, indemnification, closing

conditions, governing law etc)

Negotiation of Share

Purchase Agreement and

Joint Venture Agreement

Detailed due diligence of the Target by the Investor

Business plan, Management resources

Assets (including receivables etc)

Liabilities (debt covenants, contingent liabilities)

Key documents

Brands, intangible assets

Environmental issues etc

Implementation of

Due Diligence

Seller will prepare a Process Letter to the Investor

In response to the Process Letter, the Investor will submit a final proposal based on

the findings from the due diligence (including offer price etc)

Either the Seller or Investor will prepare the drafts of Share Purchase Agreement

and/or Joint Venture Agreement.

Submission of Final

Proposal








3

Due Diligence

Closing (Settlement and Transfer of shares)

Execution of confidentiality agreement

Disclosure of preliminary info

Formulation of M&A Strategy

Execution of LOI or MOU

Signing of Definitive Agreements

Implementation of DD

Tasks of the Investor Tasks of the SellerFlow M&A (in general)

Kick-off Meeting

Determination of DD Scope

Analysis data-room info

Q&A/ Additional info request

Interview/ Investigation

Reports from Legal Advisors/Auditors

Finalization of Proposal

Set-up of data-roomPreparation for interview

Preparation of Agreement drafts

Kick-off Meeting

Preparation of the Target Company

Preparation of Process Letter

（instructions to the Investor)

and data-room

Replies to additional

queries and requests

Valuation and Negotiation

The due diligence in M&A is a process whereby investors/buyers and their advisors conduct a comprehensive investigation

and analysis of their target companies, in aspects such as business, financial, legal, operation, technology and

environment. Business DD

Financial DD

Business DD

Environment DD

Tax DD

HR DD etc

Due

Diligence








4

The Seller

discloses the

business plan and

financial

statements of the

Target.

The Investor

scrutinizes the

business plan and

normalizes the

financials.

The Investor relies

on the revised

business plan and

normalized

financials to

conduct valuation

of Target.

Due Diligence, Valuation and Negotiation of Agreements

The DD process allows the Investor to assess the risks involved in the Transaction and understand the

business of the Target for the valuation.

Negotiation of the pricing and the definitive agreements will be based on the DD.

The Investor

reflects the risks

uncovered during

the DD in the

definitive

agreements for

negotiation.

Business DD Technology

DD etc

DD, Valuation and Negotiation

Va

lua

tion

ＤＤ

Ne

go

tiatio

n

Audit / Tax DD Legal DD Environment

DD etc

DCF Comparables Net Tangible

Assets

Negotiation of the DA

Valuation

Revised

Business Plan Normalized P/L, B/S

Business Plan Info from DD

Issues uncovered

during the DD to

be reflected in the

definitive

agreementsClosing (Settlement and Transfer of shares)

Execution of confidentiality agreement

Disclosure of preliminary info

Formulation of M&A Strategy

Execution of LOI or MOU

Signing of Definitive Agreements

Implementation of DD

Flow M&A (in general)

Valuation and Negotiation








5

Business Due Diligence

The Investor will investigate and analysis the Target, particularly in areas such as business model, market

conditions, product characteristics and quality, customer base (distribution networks, bargaining power etc),

competition, threats from substitutes and new entrants, production capabilities (technology, R&D strengths),

past financials, future business plan etc. Based on these findings, the Investor will perform a SWOT

analysis and assessment of the future profitability of the business.

Objectives of Business Due Diligence

(i) Examine the feasibility of the business plan and perform valuation of the Target based on this business

plan

(ii) Formulate a revised business plan of the merged entity, taking into consideration the synergies arising

from the M&A. Perform valuation of the Target based on the revised business plan.

External climate: Industry analysis (Five Forces Analysis)

Analysis of the Target and its management strategy, business model, internal capabilities

(Analysis of value chain, SWOT etc)

Analysis of profitability (budgeted and actual, fixed and variable costs, working capital etc)

Business Due Diligence is closely associated with Financial Due Diligence. Financial Due Diligence allows

the Investor to verify the past business of the Target, while Business Due Diligence helps the Investor to

authenticate the Target’s future business plan (based on the Financial Due Diligence).

Business Due Diligence








6

Legal Due Diligence

Impact on approvals and material contracts

It is important to ascertain the impact of the Transaction on approvals and material contracts. For example, a

change of control will sometimes lead to cancellation of regulatory approvals and licenses and termination of

contracts.

Impact on valuation of the Target

While Legal Due Diligence is not directly associated with the valuation of the Target, there are instances

whereby adjustments are made to the valuation based on the Legal Due Diligence findings, e.g. the Target

would be involved in a litigation and there is a strong likelihood that the Target would be liable for any damages.

The Investor will investigate aspects associated with the legal risks involved in the Transaction.

Legal Due Diligence will involve the review of various documents and contracts. This will allow the Investor not only to

ascertain the authenticity of the documents, but also assess the impact of long-term or unusual contracts on the

business, or any contingent liabilities on the financials of the Target.

Legal risks and their impact on the Transaction will be assessed. The Investor will normally propose schemes or add

provisions in the acquisition agreement to minimize or eliminate such risks.

Examples of legal firms with partners in Indonesia: Norton Rose, Baker & McKenzie, Milbank, Allen & Gledhill, Khattar

Wong, Letham & Watkins

Legal Due Diligence








7

Financial and Tax Due Diligence

Verification of past financial performance and profitability of the Target

Assessment of current financial and cash position, which will form the basis for the Target’s future projections.

Analysis of Income Statement

Understanding the revenue and cost model associated to the operating performance of the Target’s business

Normalization of the earnings of the company

Analysis of Cash Flows

Analysis of EBITDA projections, working capital, monthly and annual cash flows, capital expenditure etc

Analysis of Business Plan

Assessment of the consistency and compatibility of the model (based on actual and projected performance)

Validation of the assumptions used in the model

Analysis of Balance Sheet

Assessment of the potential risk involved in the Transaction

Financial and Tax Due Diligence








8

The period for the DD varies from companies to

companies, but normally spans from 3 weeks to 2

months.

Key Points

1 Period for the DD

Physical data-room or Virtual data-room (“VDR”).

Examples of VDR providers: Bowne; Intralinks.

For many cross-border transactions (and for those

which potentially involve several bidders), virtual

data-room is often used as it is more cost-effective

and efficient.

2 Venue for the DD (Data-room)

It is recommended that the Seller engages a financial

advisor, legal advisor and if necessary auditors, tax

consultants etc for the team.

While international audit firms have their

counterparts in Indonesia, we do not recommend to

change auditors at this point as it will take time for

newly appointed auditors to come up to speed

3 Team Structure

The Investor would request for information in

connection to risks involved in the transaction (such

as contingent liabilities etc). The Seller shall disclose

sufficient and necessary information for the

transaction.

Scope for the DD will have to be considered together

with the period of the DD and budget constraints.

4 Scope for the DD

A system must be put in place to allow queries (such

as those related to business, financial, accounting,

legal, environment, human resource) by the Investor

to be answered in a coordinated manner.

5 Coordination with the Investor on Data Request








9

Investor

Information Flow during Due Diligence

Investor Seller

Info

rma

tion In

flow

Info

rma

tion O

utflo

w

Queries/

Data

Request/

Interview

Request

Timeline

Queries/

Data request

list

Responses to

queries

Responses to

queries

Receives

Requests

Decides

where

to channel

the queries

Receives Responses

ReceivesResponses

Formulation

of responses

Seller’s ＦＡ

The Financial Advisor should take up the role of the point of contact with the Investor in order to facilitate the flow of the information

during the DD.

A DD, if not properly executed, will result in bad faith between the parties and negatively impact the negotiation over pricing, terms

and conditions.

Preparation

Formulation of reports

Advisors

Investor

FA

FA

Other Advisors

Seller

Advisors

Formulation of reports








10

Virtual Data Room

Virtual Data Room (“VDR”) is an online platform which hosts the documents required for the due diligence for a period of

time. It is designed such that only the staff designated by the Investor and its advisors are granted access to these

documents.

Some of the VDR service providers include Intralinks and Bowne.

Normally, the Investor will inform the Seller the names, designation and the email addresses of the staff accessing the

VDR. Once the Seller has registered these accounts, the Investor and its advisors would be given access to the VDR

with login usernames and passwords.

Some Features of the VDR

The Seller can monitor the access trails of the Investor

and its advisors.

For sensitive documents, print (and print-screen)

restrictions may be set.

Every time new materials are uploaded, the Investors

and its advisors would be notified.

The Seller can also keep track of documents printed out

or downloaded.








11

Q&A/Information Requests

The Investor would normally seek clarification or request for information in addition to that already disclosed in the VDR.

The Q&A correspondence may be done using a spreadsheet prepared by the Seller.

This spreadsheet will have columns for the Seller’s responses.

Questions by the

Investor

Responses by

the Seller

Illustration of the Q&A spreadsheet

In addition to the Q&A list above, the Seller may also provide the responses to the Investor over interviews or Q&A

sessions etc.

Note:

Confidential

1

2

3

4

5

6

7

8

9

10

11

CategoryNo.

Project Q&A List as of 2009/05/01

NameCompanyDate of QuestionNew?

Questions byReference QuestionPriority RemarksResponded by Response CheckDate of Response








12

Some Rules for Due Diligence

The Q&A sessions must be appropriately represented e.g. CEO for business sessions, legal counsel for legal and

regulatory sessions, CFO for accounting sessions.

Ground rules for decision of the Q&A sessions and the dates

Period for the Data Room

Deadline for questions and information request by the Investor

Due Diligence Period

Q&A Sessions

Timing for submission of questions and information request (e.g. 17:00 every Tuesday and Friday during the due

diligence period)

Timing for submission of responses (e.g. 17:00 every Monday and Thursday during the due diligence period)

The Investor must collate all questions (whether legal, financial or others) in the spreadsheet and send to the

Seller for each submission

The Investor must organize the questions such that there are no duplicated questions

Q&A/Information Request

Normally local staff are not notified of the Transaction. For confidentiality reasons, the site visits are positioned as

audit sessions by clients etc.

Conversations with local staff should be restricted, and no name cards should be exchanged.

The attire for the site visits and the logistics etc.

Site Visits

13

Data room rules

This document has been prepared by Daiwa Securities SMBC Singapore Limited. (“Daiwa SMBC”) based on information, the sources of which are believed by Daiwa SMBC to

be reliable, but Daiwa SMBC makes no representation nor warranty as to the accuracy or completeness of such information. Recipients of this document must make their own

decisions on whether or not to adopt the recommendations discussed in this document, based upon their specific situations and objectives. Any use, disclosure, distribution,

dissemination, copying, or reproduction of this document without prior written consent from Daiwa SMBC is prohibited.

■ TBC1. A’s due diligence of B is subject to the Rules of the Data room below.

2. Familiarity with Rules of the Data room - A is to ensure all its staff and advisors (“A parties”) are familiar with the

rules below prior to commencement of the due diligence.

3. Opening Hours: Strictly 8am – 5pm from xx to xx xx 2011

4. Venue: [ ]

5. Permitted Persons – A list of A parties that will be accessing the Data room, with company name, corporate title

and contact telephone numbers, is to be provided by A to B through D two business days before

commencement of the due diligence. Any change to the list of permitted persons must be informed by writing

two business days beforehand. B reserves the right to decide if any change is allowed.

6. Signoff on Data room files provided - A is required to sign off that they have received all the files as listed in the

Data room index which will be provided at the start of the Due diligence.

7. Signing in/Signing out - A parties are to sign in their particulars and time of entry on the Registry maintained by

K staff and to sign out their time of exit daily.

8. Designated Name tags of permitted persons are to be worn at all times while in the data room, and to be

returned to K staff upon leaving the data room. Non-removal of Data room materials - A is to procure that no

materials in the data room are to be removed by A parties at any time as these are strictly confidential and

belong to the property of B.

9. No copying or printing of any of the materials is allowed.

10. Electronic access - Internet access and landline access would only be provided on an available basis.

11. Decorum – A parties are to be suitably dressed in office attire and to maintain good behaviour as guests of B.

12. Smoking – No smoking is allowed in the data room. A parties may smoke in the designated smoking area only.

14

Data room rules (cont’d)

This document has been prepared by Daiwa Securities SMBC Singapore Limited. (“Daiwa SMBC”) based on information, the sources of which are believed by Daiwa SMBC to

be reliable, but Daiwa SMBC makes no representation nor warranty as to the accuracy or completeness of such information. Recipients of this document must make their own

decisions on whether or not to adopt the recommendations discussed in this document, based upon their specific situations and objectives. Any use, disclosure, distribution,

dissemination, copying, or reproduction of this document without prior written consent from Daiwa SMBC is prohibited.

■ TBC

13. Quiet – A parties are to be maintain quietness at all times. Where there is a need for verbal communication,

this is to be kept at a minimum and at low volumes, to avoid disturbance to surrounding area and to avoid

any disclosure of information and activities performed in the data room.

14. Non-Communication to B staff - A parties are to abide by the sensitivity of the transaction and are not

permitted to question, or talk to, or request information from K staff in the building or outside the data room at

any time except to the persons appointed by K Management to communicate with A in the operation of the

Due diligence.

15. No chatting is permitted outside the data room among A parties.

16. Non-Disclosure to outside parties - A parties are strictly not permitted to disclose any information from the

data room to outsiders. All A parties accept and acknowledge that they are bound by the Non-disclosure

agreement signed by A with B dated [ ].

17. All queries/request for information by A to B are to be submitted on prescribed form which are available in the

dataroom (Form 1). As B Management are busy running the day-to-day operations of the company, A is to

vet through any requests/queries by B parties before submitting them to B. A is to determine among other

factors, the relevance, materiality and usefulness of the information being requested and to avoid submitting

duplicate or similar questions to B

18. K is not obligated to answer any or all of the queries/request for information by A parties and will answer

them as it deems fit.

19. A’s requests on prescribed Form 1 are to be handed to B staff appointed to collect the forms at 12pm, and at

the end of the day.

20. All information provided by B to A parties remain the property of B, and are to be surrendered to B upon

demand.

21. A is to ensure A parties abide by all the Rules above. Non-compliance by A parties to any of the Rules above

can seriously jeopardize B’s position. Consequently, B reserve the right to seek damages, redress and

remedial actions including baring any or all A parties from further entry into the data room, cancelling the due

diligence, cancelling the transaction, litigation and any legal or other recourse under its disposal.

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