Business Daily from THE HINDU group of publications
Tuesday, Dec 05, 2006
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Business Daily from THE HINDU group of publications Tuesday, Dec 05, 2006 ePaper |
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Markets
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Interview Corporate - Mergers & Acquisitions
D. Murali
Chennai , Dec. 4 After outbidding Tata for Corus, Brazil's CSN (Companhia Siderurgica Nacional) has been conducting due diligence on the target of contention, Corus. As you may remember, Corus delayed the extraordinary general meeting of shareholders, so as to allow CSN time for performing due diligence. To know about the nuances of due diligence, Business Line contacted Mr Vijay Iyer, Partner, Deloitte Haskins & Sells, Mumbai. Here is his take on a few questions: What is the procedure for due diligence? Does the potential acquirer request the target for permission? Is the target legally bound to permit the exercise? Any difference between India and the UK in this regard? Normally, in a non-hostile situation, the target and the potential acquirer arrive at an initial understanding (verbal, or at times a non-binding term sheet, or letter of intent) of the principal terms of the proposed transaction. Before arriving at this understanding, target may share certain preliminary information, which again, is generally available in the public domain. Thereafter, the target provides information and access to its records to the acquirer and his advisors who carry out the due diligence exercise. As I understand, there is no specific legal requirement to permit due diligence. In fact, the Indian takeover code requires the target company to share certain shareholder information with the acquirer. Under the UK takeover code any information provided to one bidder in a public company takeover must be provided equally to any other bidder that has either made a preliminary bid or is in the process of formulating a bid. Can't due diligence be done without the knowledge of the target? To a limited extent, yes, this can be done, but only on the basis of publicly available information. This is frequently done as part of the preliminary due diligence exercise prior to making bids for public companies. Are there different levels of due diligence? Simply put, yes. The potential acquirer could start off with the preliminary due diligence that is based on public information and then carry out a more extensive exercise when he has access to the target's records. The level of due diligence is driven by the extent of access provided by target. Scope of due diligence is largely transaction-specific and is driven by the needs of the acquirer in addressing key issues and areas of concern. For example, a vendor due diligence exercise (an exercise initiated by the seller) is normally more detailed and at an extended level. How long is the process? And how is due diligence performed? It could take anywhere between two-three weeks and a few months, depending on a host of factors including access to information, quality and quantity of information provided, issues identified. Broadly the due diligence exercise is a means of identifying the risks to which the acquirer and/or his investment may be exposed and to the success of the acquisition. The process involves an assessment of the macro-economic (the market, competition, regulatory environment) and micro-economic factors (business plan and the various strategic elements - marketing, production, financial and capital requirements, quality of management team, legal structure, compliances and records) that can affect the performance of the target. Once the objectives, scope of work etc are defined and communicated, the performance of due diligence involves: use of information checklists; field work and analysis of the records of the target at a `data room' at target's offices or off site; analysis of other publicly available information; visits to target sites; meetings with target management and target's key advisors such as legal advisors, auditors; and review of work papers of the auditors and opinions obtained by target from outside counsels. An important element is that the various teams working on the due diligence exercise work as a unified team. What is the shelf life of a due diligence report? This again depends on how dated the information in the report is. While historical data remains the same, further analysis of areas such as current trading performance, contingencies, etc needs to be updated periodically. Do intermediaries perform due diligence and share the findings with more than one potential acquirers? This is possible in the case of a vendor due diligence exercise where the work is initially carried out at the instance of the potential seller and potential buyers are thereafter provided access to the report. The selected buyer who finally proceeds with the investment is then given the right to rely on the report for the purposes of making the investment. This is common in the UK and Europe, and is significantly developing in India. This is not so in the US markets. Doesn't a target too have to perform a due diligence of the acquirer for ensuring a better fit? This depends on the terms of the proposed transaction. In the case of a merger or a joint venture, then yes, target would or should normally perform due diligence on the potential acquirer/business partner as well. If the target is selling out completely, then normally in such cases, best price wins!
More Stories on : Interview | Mergers & Acquisitions | Steel | Tata Steel Ltd
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