A Recommended Approach to Due Diligence

Overview

Asset purchases have eclipsed outright company mergers and acquisitions as a strategic lever for energy companies seeking to expand their capabilities and drive shareholder value. While each can be an effective strategic option, both have a common driver of success and predictor of economic gain — effective due diligence.

Challenge

Due diligence is a critical component of the merger/acquisition process, yet many of the specific activities related to due diligence are not generally apparent. The M&A due diligence process is often marked by unresolved questions, the involvement of many stakeholders and an unrelenting need for everything to be done as soon as possible, all of which is complicated by the fact that much of the needed information is difficult to acquire.

Given the potential dangers of “analysis paralysis” and equally risky approach of shooting from the hip, it is important to have an objective partner with proven, pragmatic approaches. Based on our experience, Rich Consulting has identified three key objectives for due diligence analysis:
   • Ensure full disclosure of all issues that may have a significant impact on the
      valuation of business assets and operations
   • Evaluate the potential synergies (benefits) that would be derived from an
      acquisition or combination of business operations
   • Identify the risks associated with the transaction

Scope

Partnering with a client, Rich Consulting creates a roadmap for a thorough examination of the targeted company or asset(s).

The Scope of a Due Diligence Investigation is Necessarily Broad

• Corporate
organization and
ownership structure
• Contracts and leases
• Intellectual property
• Pending litigation
• Anti-trust issues

• Balance Sheet, Cash
    Flow, and Income
    Statements
• Financial forecasts
• Revenue recognition
   policies
• Accruals
• SEC filings, 10Ks, tax
   returns, etc.

• Market and
competitive position
• Customer
satisfaction/issues
• Strategic fit
• Potential sales and
revenue synergies

• Core processes and
   technologies
• IT systems and
   applications
• Organizational
   structure
• Operating
   compatibility and
   ability to achieve
   synergies
• Compensation and
   HR issues

• Sites and
   environmental
   hazards and
   liabilities
• Environmental and
   operational risks
• Geographic locations

Recommended Approach

Rich Consulting's recommended approach to due diligence has been developed based on our successful track record of integrating companies and assets. Our straightforward method provides the economic rationale for a successful bid strategy and for building the foundation for an effective integration effort.


• Review legal entities, (parent-subsidiaries) stock ownership interests, etc. • Review major contracts for terms, risks, and major liabilities • Review financials, including special treatments of costs, revenues, assets, and liabilities • Evaluate regulatory and environmental issues	• Determine size, growth potential and profitability of key market segments • Identify sources of sustainable advantage • Evaluate competitive position, strenghts and weaknesses • Determine customer satisfaction and buying criteria; target's share of the business, etc.	• Identify core processes, sources of advantage, and sustainability • Evaluate enabling IT systems, and determine potential synergies and integration issues • Assess organization and culture; identify synergies and integration issues	• Build initial valuation model • Perform sensitivity analyses for each of the identified synergies • Develop bid price, based on expected values less anticipated integration costs and risks • Identify seller's key requirements; combine with buyers risks and develop negotiating strategy

Results

Key Deliverables:

   • Due diligence validation, analysis, risk and synergy report
   • Robust financial model with scenario details
   • Valuation determination
   • Key integration issues and requirements

Performing effective due diligence for a potential merger or acquisition is critical to confirming your assumptions, developing a realistic valuation, creating a bid strategy and preparing for integration. Our recommended approach provides our clients with a clear roadmap, validates key data, creates a robust financial model for valuation and risk management and builds a foundation for effective integration.