Growing Business

The checklist below gives an overview of the key stages in = chronological=20 order that James Davies and Alex Moss of Close Brothers Corporate = Finance=20 believe any Finance Director should consider when evaluating any merger, = acquisition or disposal opportunities.

1. Initial steps in the process =
2.=20 Evaluation of target / disposal candidate
3. Advisers
4. = Financial=20 analysis
5. Valuation
6. Financing / sources of funding
7.=20 Negotiations
8. Legal and compliance
9. Treasury due = diligence
10.=20 Accounting issues
11. Tax issues
12. Completing the = transaction
13.=20 Post transaction review

1. Initial steps in the = process

Assess the reason / rationale for any M&A initiative=20
Fit with existing operations=20
Potential synergies (commercial/financial)=20
Entry into new markets=20
Removal of competitor=20
Disposal of non-core operations=20
Unlock shareholder value=20
Earnings per share enhancement=20
Understand whether the target is a public company, private company = or=20 partnership and ascertain which countries laws and takeover = regulations are=20 relevant for the target=20
Consideration of any regulatory approvals that may be required, = including=20 Competition Commission (MMC) or Department of Trade and Industry (DTI) =
Shareholder structure and their attitudes=20
Consider ease of deliverability especially in terms of obtaining = any=20 required shareholder approval=20
Vendor attitude to approach to be welcome or hostile=20
Likely (other) interested parties, i.e. likely to be an auction = process=20
Confidentiality or non-disclosure agreement=20
Information pack prepared on target

2. Evaluation of target / disposal = candidate=20

Corporate structure including consideration of subsidiaries, = associates=20 and joint ventures=20
Organisational structure=20
History including track record and financial history=20
Key management - track record and ambitions=20
Business operations by geography and markets=20
Accounting and finance policies and systems=20
Management strengths and weaknesses=20
Personnel / HR information=20
Markets / products and services - market share / penetration by = product /=20 service lines=20
Customer base including consideration of key customers and = customer spread=20 =E2=80=93 both sector-wise and geographically=20
Product mix and pricing=20
Industry structure in terms of market forces, opportunities, = threats and=20 key competitors

3. Advisers

Need to consider whether certain functions can be performed = in-house=20 versus outsourcing to external advisers, these include: corporate = finance and=20 debt advisory

4. Financial analysis

Financial analysis of primary financial statements - historical = and=20 forecast=20
Obligations and contingencies=20
Banking relationships=20
Existing debt facilities and any prepayment conditions=20
Consideration of any shortfall in pensions funding

5. Valuation

Market methodologies: comparable quoted companies and comparable=20 transactions considering metrics such as TEV / Sales and TEV / EBITDA = as well=20 as other industry specific metrics=20
Other methodologies: asset-based valuation methods and discounted = cash=20 flow analysis=20
Possible changes in operating environment - sustainability of = earnings /=20 threats / opportunities=20
Relevance of acquisition / control premiums=20
Other considerations such as assets for disposal, expected post = merger=20 benefits and historical trends, one-off / exceptional gains and losses =

6. Financing / sources of funding =

Debt versus equity =E2=80=93 consideration of current debt levels, = eps dilution=20 etc.=20
Equity - cash versus shares to the vendor, rights issue required?=20
Appropriate forms of funding: debt (bank, bonds, private = placements etc.),=20 mezzanine finance, leasing=20
Impact on acquirer=E2=80=99s existing facilities and lending=20 relationships

7. Negotiations

How much do you need a specific acquisition and at what price does = it=20 become uncompetitive?=20
Are there any other comparable targets?=20
Reconciling buyer and seller price expectations=20
Level of competition involved in the process=20
Timetable with key milestones

8. Legal and compliance

Form of offer =E2=80=93 via sale and purchase agreement, scheme of = arrangement or=20 offer document=20
Relevant country law and regulations involved=20
Warranties and indemnities=20
Competition aspects and knock-on effects=20
Statutory, self regulatory and best practise compliance = requirements=20 (particularly for Companies with a Stock Exchange listing)=20
Disclosure of share dealing / bids=20
Use of price sensitive information=20
Class test will determine required documentation and regulatory=20 requirements (UK)=20
Documentation=20
Shareholder approval=20
Directors=E2=80=99 duties such as bid frustration, poison pills = and golden=20 parachutes

9. Treasury due diligence

Understand cash management structures=20
Analysis of any guaranties, indemnities, performance bonds and=20 intercompany hedging contracts (interest rates and foreign exchange)=20
Analysis of =E2=80=9Ctrapped cash=E2=80=9D (overseas reserves / = escrow=20 accounts)

10. Accounting issues

Group accounting=20
Accounting for business combinations=20
Accounting disclosures in bid documentation=20
Impacts on accounting-based covenants

11. Tax issues

Tax liabilities=20
Tax implication of transaction=20
Impact of tax on choice of financing instruments=20
Regulatory requirements=20
Group structuring=20
Use of intermediate holding company / companies=20
Flexibility for funding, taking of profit / dividend=20
Losses in purchased Company?=20
Base cost for capital gains tax=20
Stamp duty=20
Treasury consents for overseas transaction=20
Vendor tax issues e.g. share for share exchange

12. Completing the transaction =

Legal due diligence=20
Offer documents / sale and purchase agreement=20
Other documentation, e.g. any financing arrangement(s)=20
Choice of form of new organisation after transaction

13. Post transaction review

Expected versus actual results=20
Culture change and morale=20
Reorganisation=20
Development of common strategic vision=20
Lessons learnt from process

Story from Growing=20 Business:
http://www.gbmag.co.uk/YZmk1HE.html

Published: = 07/05/2004=20 15:47:00 GMT

=C2=A9 Growing Business = MMIV