Professional Documents
Culture Documents
Rob Strahle
Senior Manager
Engineering & Capital Projects
Direct: +1 212 436 7439
Email: rstrahle@Deloitte.com
Location: Jersey City, NJ
The M&A Lifecycle and Overview of Todd Wilson / Bruce Gribens 5 minutes
Transaction Execution
Functional Due Diligence Breakouts Accounting, Finance, & Treasury Todd Wilson and Bryan Johnson 25 minutes each
Tax Bruce Gribens
IT Mark Andrews
Project Due Diligence Rob Strahle
Integration / Integration /
M&A Strategy Target Screening Diligence & Evaluation
Separation Planning Separation Execution
Establish a broad corporate Define and prioritize acquisition Conduct Financial / Accounting Establish operating model and Provide Day 1 stabilization of the
strategy and assess means to criteria to apply to entire and Tax diligence overall integration blueprint organization and functional
realize that vision universe of potential targets Perform business due Organize controls such as capabilities
Review portfolio against value Collect screening data from diligence, including integration management office Execute and manage integration
creation and strategic entire universe of potential commercial, operations, IT, and synergy / work thread plans
imperative targets, and apply the and HR teams Deploy all clean room analysis and
Assess and prepare for multiple, acquisition criteria to evaluate Initial internal controls Conduct clean room analysis to immediately execute on synergy
potential acquisition pathways potential fit diligence front load synergy capture opportunities
to achieve goals Prioritize initial acquisition Identify core and non-core Develop Day One requirements Define customer retention,
Identify, evaluate, and prioritize candidates and develop profiles portfolio assets and eventual and End State plans workforce transition,
strategies for achieving organic High level pre deal integration sale opportunities Design customer, market, communication and growth plans
and inorganic growth planning and initial diligence for Negotiations execution product and organizational Integration Execution Support
Assess capability to undergo a synergy opportunities including deal valuation, asset strategies IP rights protection and
strategic M&A program Detailed screening of potential or target valuation and Address people and culture management
Establish decision rights and targets on the basis of business structuring issues
accountability within the strategy, competitive strategy Refine integration planning on Develop and execute a
organization and value potential target communications strategy
Valuation of business entities,
including financial modeling,
approaches, and challenges
Approach Execution
Transaction Curve
Low
A holistic, integrated approach minimizes risks, gaps and handoffs and captures value
Our experience shows that it takes a well organized and executed, multidisciplinary approach to due diligence, focused on validating value proposition
assumptions, understanding risks and providing actionable feedback
Objectives: Identify business risks Analyze data room and any relevant external Obtain signed Definitive Agreements
Research scouting issues and contact target information Reach favorable Close terms & final pricing
Make go/no-go decision Feed negotiation, deal structure, valuation and Organize for integration
integration Continuously improve due diligence process
Make go/no-go decision
General Identify core team and specialists Identify due diligence teams Collect any outstanding data
Activities: Collect external data Hire outside experts Analyze data
Review Offering Memorandum if applicable Collect external data Develop reps, warranties, deal structure
Analyze all relevant data Prepare for site visits Conduct final contract analysis
Develop business case Conduct site visits & conduct analysis Negotiate definitive agreements
Produce initial valuation Refine valuation Reach final terms
Seek management approval Develop deal structure Execute closing agreements
Seek management approval
Identify integration manager
Transaction 360o
Day 1 Readiness
Support Communications
Identify preliminary tax structure Define tax structure Ensure legal entity readiness
Identify cash flow impact of tax issues Identify tax liabilities Provide tax input to first close
Tax
Estimate transaction taxes Give tax input to payroll readiness
Highlight executive organization and golden Define all HR related liabilities Harmonize HR policies, benefits,
parachute implications Highlight similarities/differences in total comp, compensation leveling
Identify significant union, severance or titles, perks Develop retention strategy
HR pension liabilities Develop org charts & headcount Provide input on key communication
Review processes, outsource providers needs
Identify significant litigation claims Legal due diligence Provide guidance on info that can be
Legal (Incl. Assess non-compete clauses Anti-trust diligence shared between companies
Environment Draft term sheet Draft and execute Definitive Agreement Edit and review communications
al) Highlight environmental liabilities Implement Clean Team, if applicable
Assess target profile and risk focus areas Conduct insurance due diligence Harmonize risk management policies,
Risk Conduct FCPA diligence practices, people, processes
management Regulatory diligence
Developing a successful integration plan Provide acquirer with more refined framework for
negotiations and integration efforts
Determining target operating model for capturing value and
growth opportunities Support evaluation of ongoing operating and financial
performance after transaction
Quality of earnings
Identify unusual or non-recurring adjustments
Significant operating and financial trends
Bridging operating periods
z
Analyze the Technical Application of GAAP z
z
Understand accounting implications of potential deal
z
z Informed Contract
Gain Understanding of Business, Operations, and Balance Sheet z Negotiation
Working capital and other purchase price adjustment mechanisms
Treatment of debt and other liabilities
Conduct of business between signing and close
Regulatory issues
Representations and warranties, indemnification provisions
Quality of Earnings analysis identifies potential adjustments to EBITDA, which can directly affect price, financing, and other
Why is it value considerations
important?
Other quality of earnings analyses: organic vs. acquisition growth, significant lost customers, customer concentration, FX impact
Understand operating performance and cash flow, including amounts available for debt service
Purposes of Identify items to be considered in determining the companys financing EBITDA and resulting leverage and interest coverage
Quality of ratios
Earnings
Analysis Identify items to be considered in determining historical EBITDA number for modeling/valuation purposes
Bridging operating periods and understanding variances / drivers of change in the business
Normalized EBITDA
US$000 FY15 FY16 LTM Mar-17
Revenue 100,000 120,000 125,000
Net income 10,000 15,000 17,500
Depreciation and amortization 5,000 5,000 5,000
Interest expense (income) 2,500 2,500 2,500
Tax expense 1,000 1,000 1,000
Reported EBITDA 18,500 23,500 26,000
Management adjustments:
1. Noncash stock based compensation - - -
2. (Gain) loss on disposal of assets - - -
3. Acquisition related expense - - -
Total management adjustments - - -
Management adjusted EBITDA 18,500 23,500 26,000
Diligence adjustments:
4. Independent auditors unrecorded adjustments - - -
5. One-time expenses (e.g. extraordinary legal expenses, one-time projects)
- - -
6. Cut-backs or deferrals of discretionary costs and expenses - - -
7. Unique revenues (e.g. large non-core transactions)
- - -
8. Out of period items / reserve reversals
- - -
9. Restructuring charges - - -
10. Changes in accounting policies or practices - - -
11. Non-core components of other income including gains / (losses) or asset disposals - - -
12. Off-market or other non-cash compensation - - -
13. Straight-line rent - - -
14. Related party transactions
- - -
15. EAC true-ups on fixed price contracts - - -
16. [Other] [ ] [ ] [ ]
Total diligence adjustments - - -
Normalized EBITDA 18,500 23,500 26,000
Pro forma adjustments:
17. Public company / private company costs - - -
18. Stand-alone costs
- - -
19. Impact of acquisitions and divestitures - - -
20. [Other] [ ] [ ] [ ]
Total pro forma adjustments - - -
Pro Forma Normalized EBITDA 18,500 23,500 26,000
Other Cash flow considerations
21. Capitalized internal costs (e.g. capitalized software development costs) [ ] [ ] [ ]
22. Capital expenditures [ ] [ ] [ ]
Application / consistency Organic vs. acquired Customers Cost structure Cash vs. non-cash
of GAAP (e.g. revenue growth Overlap, concentration Impact of incremental Headcount analysis
recognition, cost
Changes in revenue and trends costs or cost savings
capitalization) Bonuses and other
models Subcontractors Fixed costs vs. variable lumpy payments
Internal controls
Impact of transactions in Pro forma impact of costs Consultants vs.
Managements estimates foreign currencies losses / significant employees
and judgments (e.g.,
Normalized run-rate changes in relationships
reserve movements)
analysis Dependency, alternatives
Actual vs. budget or prior and related trends
year analyses
Terms, discounts
Interim vs. year end
accounting methods and Commitments
reporting policies Government regulations
Identify trends seasonal swings, unusual bubbles, and managements ability to manage balances
Normalized items (one-time reserve reversals, true-ups, etc.)
Working Capital Due
Peak/trough analysis (cash needs) impact on financing considerations (e.g. size of revolver)
Diligence
Understand payment terms with vendors and customers identify significant changes in terms
Purchase agreements definitions
Analysis that schedules when working capital is at the high and low points during course of a period
Peak-Trough
Consideration of borrowing capacity under revolver in order to have enough financing capacity to take into account
Analysis
WC swings
Topic Considerations
Many deals are structured as cash free/debt free meaning there will be a purchase price adjustment for cash, debt, and working capital
Purchase Price Negotiation of the Target Working Capital and the Definitions of Cash, Debt and Working Capital directly impacts purchase price
Mechanism Thorough diligence should be performed prior to committing to a Target Working Capital amount or methodology
The purchase agreement defines how working capital will be determined at closing
Peg - Closing Date Working Capital = Purchase Price Adjustment
Establishment of the Peg is different from and does not have to be consistent with the definition of working capital in the purchase
agreement (i.e., a liability could be excluded from peg, but included in definition)
Stripping out unusual liabilities that are of a non-recurring nature (i.e. large one-time accruals/payables, restructuring accruals, accruals
related to significant fixed asset purchases, etc.) is an important consideration when evaluating the target working capital peg
Establishing a Excluding certain accruals such as bonuses from peg but including in the definition effectively have the seller pay for the accruals by
reducing the purchase price
Peg
Common ways to calculate the peg:
Historical averages (excluding anomalies)
Projected closing date balances
Projected averages
Industry norms (especially for carve-outs)
Collar, ceiling, floor
Non-Operating Cash Flows: Cash flows that are not related to the day-to-day, ongoing operations of a business (non-
Definition
working capital)
Identify significant cash flows which may not be included in management projections, models
Purpose of
Understand true cash needs during modeling period
Analysis
Purchase agreement negotiations (definitions of debt, escrow requirements, representations and warranties, etc.)
Earnouts
Availability of informationat least all the open years for tax (generally 34 years)
Consistency of informationdoes data contradict itself?
Ability to anticipate issues
Mitigating factors for exposures or issues that may arise during diligence
Tax returns timely filed (income, sales, property, payroll, escheat, VAT, etc.)
Tax exposures and reserves
Key areas
Key areas
Acquisition structure
Post acquisition restructuring
ETR modelling
Integration
Key areas
Restricting the scope of seller diligence may detract from its value.
Potentially
Due diligence conducted by a purchaser would identify the issues anyway
unnecessary
but with seller diligence you have early knowledge and control over the
disclosure of deal
release of this information.
issues
Process may You have much greater control than if several bidders are all doing
be too demanding of acquisition due diligence simultaneously using their own advisors.
managements time
For credibility, it is critical to issue a balanced report that fairly reflects the
Diligence report
business. You will be made aware of any issues and have the opportunity to
might be too
address them proactively. This is not possible when purchasers conduct their
negative
own due diligence.
If the scope is carefully set and the report is balanced, then bidder focus
Buyers will still do
should be limited to key areas specific to their funding structure and
their own diligence
individual integration issues.
Better quality of indicative bids and a level playing field for bidders should
We effectively pay
help to maximize value of the sale, thereby returning the value of the costs
for buyer diligence
involved by multiple times.
Proprietary
Technology
Key IT Due Diligence Objectives
Level of business enablement, automation, and Development platform, tools, and environment Data architecture and analytics tools (or
integration Technology roadmap and cost projections capabilities)
Age, support, and maintenance plan Data integrity, quality, and comprehensiveness
Application stability and scalability Managements ability to access, analyze, and
Vendor performance, viability, and report on business data
commitments Information Data as an asset
Investment requirements and TCO Technology
Environment
Security & Compliance
Organization & Process
Security governance and oversight
Staff capability, tenure, sufficiency Physical and logical security controls
Outsourcing and consulting relationships Infrastructure Security risk assessments and mitigation efforts
IT governance standards and maturity Industry and regulatory compliance (PII, PCI,
Strategic planning and projects Data center and hosting environment capacity HIPAA, etc.)
and safeguards Risk and cost exposure from security
Data backup and disaster recovery
Hardware age and viability deficiencies and non-compliance
Labor spend and cost benchmarks
Hardware reliability, performance, and scalability
Vendor performance, viability, and commitments
Investment requirements and TCO
Evaluate IT enterprise architecture, systems, policies and procedures High-level summary of key issues, risks and
observations in regards to the redundancy,
Evaluate organizational effectiveness when business systems are scaled, determining the
impact of anticipated growth on both the systems and the personnel stability, scalability, reliability and security of IT
systems
Start at the highest level and then progress deeper as necessary
Customer product technology risk analysis
Consider utilizing industry subject matter advisors to assist on an as-needed basis (quality/sustainability)
Identify the application of innovative technologies to standard business problems. This Customer product technology evaluation report
includes technologies such as enterprise cloud adoption, data analytics, enterprise mobility
Order-of-magnitude estimates of expected
and social networking
costs, resources and timeframes required to
address risks and issues, and capitalize on
potential improvements
What are each IT groups responsibilities? IT skills not aligned with current / future requirements
Is there a succession plan or cross training in place for Lack of a dedicated leader or leader is not the right fit for the
key staff? organization
Organization How many business users is your team supporting? Organization size and associated costs are misaligned with the
Is there a developed IT career path roadmap to help rest of the industry
retain talent? Staff utilization is too high/low for a prolonged period of time
Turnover rate is high
IP is not spread across the team
Are IT processes and procedures documented? Lack of disaster recovery and other documented processes
Discuss IT-related assessments Processes are not comprehesive
Processes and Discuss your change management process Audits have consistent critical findings
Controls Have you had any security breaches? Are policies in place IT Operations are not monitored or not run in an effective and
to deal with breaches? efficient manner
How often are IT operations metrics reviewed? Shadow IT costs exist in the organization
Discuss any reliance you have on outside vendors Expired maintenance contracts
Are all software licenses current? Contracts that are non-transferable
Vendors &
How are vendor costs monitored against market rates? Significant dependency on a vendor with no contingency plan
Contracts
Are current versions of software and infrastructure in in place if vendor service abruptly ends
place and supported by relevant vendors? No regular review of vendors rates to ensure cost efficiency
Discuss the overall IT budgeting process CapEx and OpEx are disproportional to comparative companies
Discuss any significant variances between the operating No IT Budget or process exists
budget for this year and last year Unexplained variances in year over year costs
Spending
Provide details concerning any unusual or unexpected Unusually different CapEx compared to historical department
costs related to software or infrastructure that have trends
occurred recently
What level of customization has been performed on your Consistent system reliability issues or complaints
systems? Significant number of systems customizations that make it
For proprietary applications, please discuss your system difficult to maintain or upgrade the system
development life cycle Build up of technical debt
Applications Are applications significantly integrated? Obsolete applications
Did you experience any recent compliance issues? Complex application suites
System is not readily scalable
System has known security holes
Non-compliant IT systems
Engage IT early in the deal cycle to help maximize benefits and minimize risk
Follow a clearly defined Due Diligence framework to allow the analysis to cover all expected results
Develop a team of core resources and a pool of advisors on all typical IT areas
Planning Clearly define the areas and questions to be addressed during the Due Diligence so the IT Team can focus its effort on the
appropriate domains
Timing, responsiveness, and flexibility is key to these fast-paced transactions. Team members should have a significant level of
flexibility to work with the Deal Teams timeframe
Focus Due Diligence analysis on critical high-value / high-impact areas
Prepare significantly to ask the right questions of the Targets Senior Management
Pursue open requests for data until all critical information has been received
Escalate quickly and frequently if the Target is not providing requested data in a timely fashion; check electronic data room
Execution
frequently and keep IT data request list updated
Understand that remediation costs and integration costs will likely be an order-of-magnitude during the due diligence phase
(driven by confidentiality of the deal and imperfect knowledge of the Target)
You think you are getting this Or are you getting this instead
Copyright 2017 Deloitte Development LLC. All rights reserved. 43
Project Due Diligence
Construction projects are risky and unpredictable
To address this, engage engineering and construction specialists who have skills or experience in the construction field
Why perform
PROJECT
diligence? Get behind the numbers to form a view on the true revenues, costs, and margin of the target companys core business
supporting the Net Working Capital
A capital projects survey from the Project Management Institute (PMI)* found that only:
54% of projects are completed on-time 38% are finished on-time and within budget
54% are completed on budget 65% met their original goal and business intent
Risks
Perspective on industry trends and challenges
Inaccurate/aggressive budget Untimely, inadequate
Technical, geographic and management execution challenges estimates information flow
continuing for large projects
Cost overruns and scope Outdated management
Evolving leadership and management requirements for complex change technology and processes
capital projects
Poorly structured contracts Inconsistent project controls
Resource constraints and the global competition for talent
Unorganized resources and Schedule delays
Innovative contractual frameworks for capital projects inexperienced staff Potential claims and litigation
Poor upfront planning and estimating processes Unproven and/or new Joint venture/consortium
Lack of a correct, transparent and continuous feedback loop on technology collaboration and goal
projects Untimely resolution of alignment
Inadequate systems and performance reporting to effectively corrective actions
Inappropriate third-party
manage capital projects and manage risk Global expansion and costs
understanding of Contract compliance issues
economic/political/business
environment
Specifically tailor due diligence based on the Targets operations and the contemplated deal structure
Project Beach
Company A (larger firm) buying Company B (smaller firm) agree to deeper due diligence
Typical WIP Data Additional WIP Data Examples of Potential Output Selection Criteria
Job Number Contract type Projects in 20% to 90% POC range
Job Name JV or no JV ETC > Materiality
Descriptive (Profit Center, etc) Estimate to complete Current Year Revenue > Materiality
Budget Cost Unbilled Contract Type (Fixed price or lump sum)
Budget Margin Cost or Revenue not Joint Venture
recognized
Can be by year or cumulative to date Burn Rate Variance > 10%-30% depending on materiality
Schedule data (NTP
Cost to Date Under recognized margin - compare margin recognized against budget
and Substantial and % complete say > -10%
Earnings/margin/profit Completion)
Margin fade - as a % or materiality (reporting periods, or budget)
Revenue/billings Calculate costs to date
vs cost to complete Unbilled > than % or materiality
Percent complete
(linear, but high level) Project less than 20% complete with significant unbilled or variances
EAC (estimate cost at complete)
in % complete
EAC (estimated revenue at
Projects that are shown as 100% complete, but there is $ left to bill
completion)
$600,000,000
Count of Each
$500,000,000
1616800
0 Criteria - 65
1 Criteria - 79
2 Criteria - 33
$400,000,000
3 Criteria - 2
Estimate to Complete
$300,000,000
$200,000,000
1483800
$100,000,000
1684400 1437600
1675800
$- 17656
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
1ALOG10
$(100,000,000)
$(200,000,000)
Percent Complete
Do we have any view as to whether Area of margin erosion was observed with respect to forecasting man-hours, original budget ETC was
management is being conservative or manually decreased to win project
aggressive in their estimates to Time driven cost line items were inconsistent with latest progress schedule, indicating missing costs
complete/estimated revenue and reduced margin
Profit margin decreased from an original margin of 10 percent to 2 percent as a result of customer
related delays and customer driven design changes, which are not resolved and based on aggressive
recoveries
A buyout or purchase savings line item was identified that will not be realized based on deeper dive
testing
Are there any contractual Instances identified in which the Target has performed work without an executed contract
weaknesses/unfavorable terms or Contract states that fully integrated CPM schedule needs to be approved by Owner before payment,
other risk management issues work has started, and receivables are increasing
Is there anything unusual in the way A number of pending claims identified in the selected projects for which costs were not included and
they are accounting for the contracts revenue was over recognized in the EAC
that might impact the reported results
Copyright 2017 Deloitte Development LLC. All rights reserved. 49
Wrap Up / Q&A
M&A due diligence workshop
James Mark Andrews Robert Strahle
Managing Director Senior Manager
Deloitte Consulting LLP Deloitte Advisory LLP
Bryan Johnson
Senior Manager
Deloitte Advisory LLP