Due Diligence

WILLIAM J. GOLE, MBA, CPA, is the former Senior Vice President, Planning and Business Development, with Thomson Healthcare, a division of Thomson Reuters, where he was responsible for strategic planning and acquisition and divestiture activity. PAUL J. HILGER, CPA, is the former Executive Vice President and Chief Financial Officer of Thomson Healthcare. He has over twenty-five years of financial leadership experience, and has led numerous acquisitions and divestitures from planning through integration.

"The authors of this book offer what they call a holistic approach to the due diligence aspects of corporate mergers and acquisitions. Although the authors briefly point to legal considerations in the M&A process, this is not a legal title. It was written by CPAs to provide practical guidance to due diligence activities. The authors accomplish this goal therefore the book would be more approporiate for an undergraduate or graduate business library than an academic law library." (Legal Information Alert, Vol 29, No 3)

• Preface xiiiStep-by-Step Guidance xiiiOrganization xivPlanning xvInvestigation xviExecution xviiAbout the Authors xixPart One Planning 1Chapter 1 Introduction 3Overview 3Mergers and Acquisitions: A Way of Corporate Life 3Mixed Results 6Acquisition Risk and Due Diligence 7Preventable Causes of Failure 10Myopic Approach to Due Diligence 11Reacting to Deals 11Compartmentalized Behavior 13Inactionable Findings 13Exclusive Focus on Risk Mitigation 14Key Success Factors 14Holistic View of Due Diligence 14Growth Strategy 15Integrated Management 15Purposeful Action 16Value Orientation 16Due Diligence and Value Creation 16Plan to Create Value 16Strategic Purpose 17Value Drivers 20Key Risks 23Purposeful Behavior 24Key Points 25Chapter 2 Planning for Value Creation: Growth Strategy 27Introduction 27Central Role of Strategic Planning 27Chapter Focus 28The Strategic Planning Process 29Managing the Process 30Characteristics of an Effective Planning Process 31Process Overview 32Strategic Assessment 32Market Targeting Process 33Investment Objectives 34Market Expansion 35Vertical Integration 37Infrastructure Improvement 38Investment Alternatives 38Characteristics of Investment Types 39Backup Planning 45Plan Outputs 46Conclusion 51Key Points 51Chapter 3 Implementing the Growth Strategy 53From Identification to Pursuit 53Choosing an Acquisition Strategy 53Winnowing Process 54Identification 58Marketplace for Acquisitions 58Identifying Prospects 59Qualification 64Strategic Fit 64Availability 66Engagement 67Proactive Engagement 68Role of Management versus Intermediaries 70Confidentiality of Information: Nondisclosure Agreement (NDA) 70Reactive Engagement 71Assessment 73Notification/Approval Document 73Plan to Create Value 76Pursuit 78Transaction Framework: Sellers’ and Acquirers’ Different Perspectives 79Taking Action: Assembling the Core Acquisition Team 81Key Points 83Part Two Investigation 85Chapter 4 Preparing for Due Diligence 87Introduction 87Due Diligence Reviews 88Chapter Focus 89Environmental Factors 90External Constraints of the Sale Process 90Internal Limitations of the Acquirer 92Nature of the Target Company 92Impact of Environmental Factors on the Review 93Creation of the Due Diligence Team 93Introduction 93Composition of the Due Diligence Team 94A Caveat 97Other Considerations 97Initial Preparation Measures 98Development of the Due Diligence Program 99Program Development Process 99Key Aspects of the Due Diligence Program 100Objectives, Procedures and Findings, and Recommendations Illustrated 103A Due Diligence Mind-Set 105Planning Due Diligence 106Finalize the Program 106Mechanisms for Team Coordination 107Resolve Issues of Overlap 107Maintain an Aggressive Posture 107Communicate Logistical Information 108Communicate Responsibility and Timing of Report Submissions 108Key Points 108Appendix 4A: Due Diligence Checklist 109I. Review Company Background and Organization and Proposed Transaction 109II. Financial 112III. Technology 114IV. Products 115V. Marketing and Sales 116VI. Legal 116VII. Insurance 119VIII. Human Resources 119Chapter 5 Conducting the Due Diligence Review 125Introduction 125Overview of Transaction Types 125Auctions 126Auctions: The Buyer’s Perspective 127Preemptive Bids 128Purchase Premium Preemption 129Price Preemption: The Buyer’s Perspective 129Relationship-Based Preemption 130Relationship-Based Preemption: The Buyer’s Perspective 130Summary of Transaction Characteristics 131Components of the Due Diligence Review 131Management Presentations 132Management Team Interviews 134Document Review 135Tour of the Facilities 136Technology Trade-Offs 137Due Diligence Reviews: An Objectives-Driven Approach 138Overview 138Due Diligence Objectives 139Integration 140Assessment by Function 141Finance and Accounting 142Human Resources 145Sales and Marketing 148Research and Development 150Information Technology Review 151Operations/Production Review 152Legal and Insurance Review 153Cross-Functional Coordination and Analysis 154Conclusion 159Key Points 159Appendix 5A: Illustrative Final Process Letter Outline 160Invitation 160Description of Transaction Process 160Guidelines for Final Offers 161Appendix 5B: Illustrative Data Room Information Listing 161Chapter 6 Reporting on Due Diligence: Deliverables and Decisions 165Introduction 165Outcomes of the Due Diligence Review 165The Importance of Backup Planning 166Elimination in the Auction Process 167Outputs/Reports 168The No-Go Decision 170No-Go Discoveries 171Strategic Issues 171Valuation Issues 172Risk Issues 173Outputs/Reports 175Renegotiations of Major Terms 175Outputs/Reports 178Decision to Proceed 179Outputs/Reports 179Comprehensive Due Diligence Report 180Summary Due Diligence Report 180Corporate Approval Document 182Integration Plan 186Contingency Plan 188Key Points 188Part Three Execution 191Chapter 7 Optimizing Value: Translating Due Diligence Findings into Action 193Acting on Due Diligence Findings 193Preacquisition vs. Postacquisition Issues 193Revisiting the Valuation and Purchase Price 195Reviewing the Acquisition Transaction Structure 199Contingent Purchase Price 199Acquiring Assets vs. Stock 200Sharing Risk: Contractual Terms and Conditions 202Marking Up the Draft Purchase Agreement 202Contract Drafting and Revision 202Key Sections of the Purchase Agreement 203Purchase and Sale 203Closing 205Representations and Warranties of the Seller 206Representations and Warranties of the Buyer 208Covenants 208Employment Matters 209Conditions to Close 210Termination 211Indemnification 211Tax Matters 212General Provisions 212Disclosure Schedules 213Transition Services Agreement 213Managing Contract Negotiations 215Effective and Efficient Negotiations 215Empowered Leadership 215Support of Legal Counsel 216Support by Experts 217Review and Feedback 218Commitment to Getting the Deal Done 220Closing 220Shepherding the Transaction toward Closing 220Regulatory Approval 221Hart-Scott-Rodino (HSR) Act 221Buyer Financing 224Third-Party Consents 224Closing the Transaction 224Key Points 225Chapter 8 Integration: Extracting Value and Mitigating Risk 227Dual Focus of the Integration Effort 227Extracting Value 228Mitigating Risk 229Integration Team 231Early Formation 231Leadership 232Structure and Composition 233Integration Plan 234Plan Components 234First 90 Days vs. Longer Term 238Management of the Integration Process 239Communication 239Reporting and Decision Making 242Contingency Plan 245Broader View of Risks 245Plan Components 245Human Factors 247Culture 247Knowledge Transfer 249Recommendations for Postacquisition Management 250Key Points 251Appendix What is the Premerger Notification Program: An Overview 253Index 275