Due Diligence

Akul Jhajharia
Abhimanyu Suresh
Gaurav Swamy

Meaning
O The care that a reasonable person
exercises to avoid harm to other persons
or their property.
O Research and analysis of a company or
organization done in preparation for a
business transaction (as a corporate
merger or purchase of securities).

Steps for Due Diligence
Process

O Planning Phase
O Data Collection
O Data Analysis
O Report Finalization Phase
Steps for Due Diligence of
Stocks
O Capitalization of the Company
O Revenue, Profit and Margin Trends
O Competitors and Industries
O Valuation Multiples
O Management and Share ownership
O Analysis of Balance sheet
O Stock Price History
O Stock options and Dilutions Possibilities
O Expectations
O Risks

Types of Due Diligence
O Legal Due Diligence
O Financial Due Diligence
O Business Due Diligence

Legal Due Diligence
O Pending lawsuits against the Company
O Pending lawsuits initiated by Company
O Description of environmental and
employee safety issues and liabilities
O List of material patents, copyrights,
licenses, and trademarks
O Summary of material contacts
O History of SEBI or other regulatory agency
problem, if any.
Case: Northstar Life Services
O A client submitted a life policy that it was
considering purchasing to NorthStar,
along with the related due diligence
materials, for review and risk analysis.
O The client wanted to assess the risks if
any.
Key Issues
O Legal department was able to identify that the
policy owning trust was established for the
benefit of a friend of the insured.
O The laws of most states specifically provide
that a person who purchases a life policy must
have an insurable interest in the insured at
the time the life policy was originated.
O In addition, this particular case was originated
in a state that takes the position that a life
policy purchased for the benefit of someone
lacking insurable interest is treated as void.
Benefits
O The client passed on the purchase of this
life policy based on NorthStars risk
analysis.

O NorthStar was able to identify a clear risk
that the carrier may later raise the
insurable interest issue to attempt to avoid
paying the related death claim on this life
policy.
Financial Due Diligence
O Annual and quarterly financial information
for the past three years
O Financial Projections
O Capital Structure
O Other financial information

Case: Riveron PE Firm
O Riveron served a private equity client who
pursues investment opportunities across
different sectors.
O Its management team focuses on companies
with revenues between $20 million and $150
million.
O They specialise in management buyouts,
recapitalizations, and growth, among others.
O Their client had a letter of intent to purchase a
multi-unit retailer with $100 million in sales, as
an add-on acquisition for an existing portfolio
company.

Approach
O Coordinated with target executives to obtain
information necessary to evaluate and support the
historical and projected financial position of the
business.
O Focused on a full operational review, identifying key
risk factors and operational metrics, plus analyses of
forecasts, the balance sheet, and working capital.
O Initial findings were reported to the client daily.
O Draft report was used to assist in final deal
negotiations.
O Final report was issued to complete the engagement
and financing with the lender.
Outcome
O Able to isolate certain issues through our
detailed review of balance sheet
accounts.
O Highlighted certain areas of ongoing
financial and operational risk.
O Client used these findings to assist in final
deal negotiations and deal structure, and
to define areas of post-transaction focus.
Business Due Diligence
O Organization and Good Standing
O Financial Information
O Physical Assets
O Business Model
O Employees and Employee Benefits
O Customer Information

Case: KPMG
O The client was considering an investment
in certain business units of an established
facilities management provider.
O The client wanted to better understand the
key financial, tax and commercial factors
affecting the Target business in order to
make an informed investment decision.
Key Issues
O The composition and valuation of the targets
assets
O The company's revenue recognition policy
and other key accounting policies
O The level of revenues and costs, which are
expected to recur in the future as a basis for
purchase price negotiations
O Tax structuring opportunities
O Key management at the Target whose
retention would be critical to the business post
acquisition

Outcome
O Enhanced the probability of success by
providing intelligence on key risks and
benefits throughout the transaction.
O Addressed clients key questions and
concerns, helping management to
understand the post-closing implications
early on in the due diligence process.
O Gave them the confidence to move
forward and close the transaction on the
best terms.