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Due Diligence in M &

A
Group 8

Group Members

Shriprakash Tiwari-169
Sahil Save-140
Aneeket Vare-176
Bindu Singh-157
Sanil Malwankar- 90
Sanyam Khanorkar- 76
Purva Sule-163
Pravin Yeolekar-179
Nilin Kaskar- 73
Omar Jaleel- 64
Vidit Trivedi-170

CONTENTS
Sr.
No.

CONTENTS

1.

INTRODUCTION

2.

TYPES OF DUE DILIGENCE

3.

PROCESS OF DUE DILIGENCE

4.

COMPLIANCES IN DUE DILIGENCE

5.

REASONS FOR M&A FAILURES

6.

CASE STUDY DAIICHI & RANBAXY

7.

CASE STUDY BRE-X MINERALS & FREEPORT-MCMORAN

8.

CONCLUSION

Introduction
Reasonable steps taken by a person to avoid committing a tort or
offence.
Generally, due diligence refers to the care a reasonable person
should take before entering into an agreement or a transaction
with another party.
Process of evaluating and investigating a prospective business
decision by getting information about the financial, legal,
intellectual and other material information from the other party.
It attempts to reveal all material facts and potential liabilities
relating to the target company/unit/business.

Need for Due Diligence


Due diligence helps in understanding the following about the
company:
Capital structure including shareholding pattern
Composition of board of directors
Shareholders agreement or restrictions on the shares
Level of indebtedness
Whether any of its assets have been offered as security for raising
any debt.

Need for Due Diligence(contd.)


Any significant contracts executed by it
The status of any statutory approvals, consents or filings
Employee details
Significant litigation, show cause notices and so on
relating to the target and/or its areas of business
Intellectual Property of the Company

TYPES OF DUE
DILIGENCE

Operational Due Diligence


It is the process by which a potential purchaser
reviews the operational aspects of a target
company during mergers and acquisitions
The ODD review looks at the main operations of
the target company and attempts to confirm (or
not) that the business plan that has been provided
is achievable with the existing operational
facilities plus the capital expenditure that is
outlined in the business plan
It will consider whether there is the potential for
additional value to be wrought out of the target
company by improving its operational function

Commercial due diligence


Commercial Due Diligence (CDD) is the process of
appraising a target by reference to its market
how market or competitive uncertainty will impact
the value of a company (e.g. due to new
technologies, customers, trends, legislation,
powerful buyers, or a new geographic market)
the feasibility of realizing revenue/EBIT projections
that appear very aggressive compared to in the
past
the validity of assumptions about revenue/EBIT
projections that are based on the success of new
products, customers or markets

Financial due diligence


Where the target company's financial status is reviewed
To be assured that a firm they wanted to buy showed
correct figures in its financial reports, its accounting is
correct and transparent, and tax risks are not significant.
The main points of the investigation are:
Fixed assets and inventories
Accounts receivable
Accounts payable
Revenue and other income
Cost of products and other expenses
Tax risks

Legal due diligence


Legal due diligence is necessary to give the buyer the information that it
needs to learn about the target company and to structure its purchase of
the company and to structure its purchase of the company
the buyer and its counsel will search for more subtle indicators of value or
potential liabilities in things such
I. Organizational documents and important contracts (e.g., is the company
restricted in how or where it operates its business or subject to unusual
pricing terms or contingent liabilities?)
II. Lawsuits to which the company is a party,
III. Insurance policies benefiting the company
IV. Employee benefit and labor arrangements
V. Intellectual property owned or used by the company
VI. Rights or obligations under earn-outs or indemnification provisions
. The information learned in the legal due diligence process will be helpful
for both the buyer's counsel and your company's counsel in drafting and
negotiating the merger or acquisition agreement and related ancillary
agreements.

Reputational Due Diligence


Reputational Due Diligence concerns the careful evaluation of
reputational risks attached to a business partner or target
company including issues of integrity and reliability of the
individuals involved, as well as the trustworthiness and
predictability of the political environment.

PROCESS OF
DUE DILIGENCE
DUE DILIGENCE IN M&A

PROCESS OF DUE DILIGENCE


360 of Due Diligence

Financial/
Accounting
Tax

Legal

Risk
Management

Due
Diligence

Human
Capital

Operational

Technical

PROCESS OF DUE DILEGENCE

PROCESS OF DUE DILIGENCE


STEPS IN DUE DILIGENCE
Compiling of Due Diligence Check List
Procuring Detailed information/documents as per
the checklist
Analyzing of Information/Documents
Critically evaluating the analyzed information
Preparing a report with suggestive actions

PROCESS OF DUE DILIGENCE


Compiling of Due Diligence Checklist

Compiling a due diligence checklist is a


resourceful tool when undergoing a merger
and acquisition. The checklist assists in
covering all business components to ensure
that a proper investigation is performed in
order to prevent any delays or complications
for the involved parties.

PROCESS OF DUE DILIGENCE


Some Important Points to cover in the Checklist

Overview of the Agreement


Accounting Policies of Target
Audit & Review Processes of Target
Corporate & Legal aspects of Target
Review of Capital Structure
Review of Income Structure, Tax Structure
etc.
Suppliers, Vendors, Personnel & Labor
relations

COMPLIANCES
IN DUE
DILIGENCE

PROCESS OF DUE DILIGENCECOMPLIANCES


Due Diligence

Stock Exchange Compliances


Property/ Leases Compliances
Litigation & Claims
Environment

Insurance

Corporate Compliances
Labour / HR Compliances
IPR
Financial & Taxation
Agreements/ Arrangements

CORPORATE COMPLIANCES
Complete group structure & inter-group transactions
Nature of business
Financials
Statutory Registers & Minutes Books
List of all documents.

LITIGATION, INVESTIGATION &


CLAIMS COMPLIANCES
Review of all disciplinary proceedings.
Review of any order or judgment
Review of any current litigation/arbitration

INTELLECTUAL PROPERTY RIGHTS


COMPLIANCES
Review of all intellectual property rights.
Review of all confidentiality agreements.

LABOUR/HR COMPLIANCES
Business activities, office locations & hours of work
for each of the office.
Labour contract.
Employer supervision
Exemptions

ENVIRONMENTAL
COMPLIANCES
Licenses, permissions, authorizations and consents from
environmental authorities.
Details of any breach of any law, code.
Environmental management committee reports
Hazardous materials, spills, emissions etc. of the Company.

CCI in M & A
All M & A with combined turnover of Rs 4,500 crore or more
will require approval of CCI (Competition Commission of
India) from June 1, with an objective to safeguard interests of
consumers and promote industrial growth.

REASONS FOR
M & A FAILURES

Reasons of M & A Failures


Poor Strategic Fit
Strategic fit includes
. business philosophies of the two entities
. time frame for achieving these goals
. way in which assets are utilized
Mergers with strategic fit can improve profitability through
. Reduction in overheads
. Effective utilization of facilities,
. The ability to raise funds at a lower cost, and
. Deployment of surplus cash for expanding business with higher
returns

Reasons of M & A Failures


If merging companies have entirely different products, markets systems
and cultures
Shifting away from the core competencies
Faulty evaluation
Incomplete and Inadequate Due Diligence
Failure to Set the Pace for Integration
Over Leverage
Limited Focus

CASE - STUDY
Due Diligence in M&A

Daiichi Sankyo acquiring Ranbaxy


On 11th June 2008, Daiichi Sankyo the third largest
pharmaceutical company in Japan made an offer to buy
control stake in Ranbaxy, the largest drug-maker by revenue
in India
Daiichi Sankyo made an offer to purchase more than 50.1%
voting right in Ranbaxy which included 34.83% stake of
promoters, preferential shares and an open offer
Daiichi offered a share price of INR 737 with a transaction
value of around $4.6 billion, valuing Ranbaxy at $8.5 billion
Daiichi ended up acquiring 63.92% shares of Ranbaxy by
Nov, 2008

Daiichis attraction from the


deal
Leading producer of generic drug - including a
version of Pfizers Lipitor, a cholesterol-reducing
treatment described as being the largest selling drug
of all-time
Got access to Ranbaxys basket of 30 drugs for which the
company had approvals in the US which included 10 drugs
for which Ranbaxy had exclusive sales right to sell for six
months after the expiry of their patents

Global footprint
Access to new markets

The merger failed because of:


Poor due diligence
Lack of understanding of generic business
Actions taken by FDA
Cultural differences

Issues
The US Food and Drug Administration (FDA) announced
an investigation into HIV drugs made by Ranbaxy
Daiichi Sankyo knew about the quality issues spotted by
the FDA, but didn't expect imports of drugs to be barred
September 2008 - a ban was imposed on the imports to
US of 30 of the companys generic drugs due
manufacturing problems at some Ranbaxy plants
In spite of the issues raised by the FDA and a global
financial crisis that was entering its critical phase, Daiichi
Sankyo continued with the transaction

Issues
One more prominent thing that Daiichi probably
missed on was the continuously increasing debt
levels of Ranbaxy.
Daiichi Sankyo did not try to lower the purchase
price- even after news of disaster started to break
around in the middle of 2008 and greatest
financial crisis in history was forcing a brutal
downwards adjustment in asset prices.
2013 Ranbaxy pled guilty to US felony charges
and paid $500 million in fines for manufacturing
substandard drugs and lying about it.

CASE STUDY
Due Diligence in M&A

Some major Failures


Survey conducted by McKinsey and company
shows that many parent companies often over
estimate the value of target company due to lack
of due diligence.
In 1998 the German auto car maker Daimler Benz
merged with Chrysler Group for a value of $36
billion. It was perceived to be a merger between
equal but after a few years, the value of Chrysler
fell to a mere $7.4 billion and the merger had
proved
to
be
a
failure.
The failure was attributed to inability to conduct
due diligence It over estimated the value of the
target company which led to the merger being

How due diligence saved a


company from big fraud
Canadian exploration firm, Bre-X Minerals Ltd.,
announced that it had made one of the world's
largest gold discoveries containing some 3-4% of
the world's reserves .
This news resulted in rise in the value of Bre-X
shares giving the company a market capitalization
higher than that of several major mining
companies.
Eventually, Bre-X proposed to form a partnership
with Freeport-McMoRan, a U.S. company. Before
making a firm commitment, Freeport insisted on
carrying out due diligence.

After Due Diligence


The results shook the mining industry
Bre-X reserves contained no significant
gold
After the scam was uncovered, the Bre-X
share price crashed, and disgruntled
shareholders (who lost about $3 billion)
began taking legal action against the
company.

CONCLUSION

CONCLUSION
Due diligence conducted must be reasonable, but it
need not be perfect.
Due diligence is not just there to identify risks, it can also
identify opportunities to improve effectiveness, cut costs
and fully leverage resources.
Even if an expert can later find fault, the experts ability
to poke holes in the diligence of investigators does not
automatically create liability.
Companies are complex entities operating in a complex
world; no investigation can uncover all the potential risks
of an acquisition.
The point is to make a good faith effort to do so, within
the limits of time and funding, and in consideration of
what matters most the long-term financial health of
the surviving company and its stakeholders.

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