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.
Strictly Private & Confidential
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.
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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.
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.
Strictly Private & Confidential
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
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.
Strictly Private & Confidential
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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