Takeover Due Diligence Being Undertaken
We keep hearing and reading that the parties interested in lodging a formal bid for Manchester City Plc are undertaking due diligence and many supporters have contacted us asking us what it actually is. Due diligence can mean different things to different companies; however, for the purpose of this article we will be looking at due diligence in terms of acquiring a business. This article by no means attempts to be comprehensive, it is simply meant to give an overview.
Before making an offer for any business, a process of evaluation should be undertaken on the business being considered for purchase. This evaluation process is called due diligence and once completed should give the prospective buyer sufficient information to enable them to make an offer for the business or decide not to proceed.
Reports indicate that Thaksin Shinawatra’s advisors are undertaking due diligence on Manchester City Plc but it is unclear whether Ray Ranson has been given permission to do this; although he may have been provided with basic information. The “mystery Americans” do not appear to have undertaken any due diligence but could also have been provided with basic information.
Some of the areas due diligence might cover are-
1) A review of the industry (football) and the company’s place in it – is the market growing or shrinking? In respect of the target company, what are its strengths, weaknesses, opportunities and threats? What is the company’s general standing and reputation? What is the nature and extent of competition
2) Ownership – capital structure and voting rights; disposition of shares.
3) Directors – names, ages, length of service.
4) Management and employees – quality of management; ages qualifications and contractual terms of key managers and employees; staff turnover etc.
5) Financial performance (over the last few years) – turnover and profit trends; liquidity / cash flow trends; capital expenditure (player purchases); accounting policies and any audit recommendations; level’s of debt. The latest management accounts and budgets , forecasts and business plans are likely to be reviewed and an audit of the accounting records may also be undertaken.
6) Revenue – a review of the main income streams and distribution channels and any associated contracts, future projections, overseas expansion, research and development.
7) Assets – a comprehensive review of all assets (possibly including independent valuations of property), depreciation costs.
8) Liabilities – all loans, credit agreements, leases and their terms, expenditure commitments.
9) Treasury – review of all cash assets, banking relationships, credit lines.
10) Culture – review of the company’s style of management, business practices, decision-making processes, command structure etc
11) Risk management – review strategies to mitigate risk, insurance policies, contingent liabilities (litigation threats).
The process of buying a company often involves numerous professional advisers, such as: merchant bankers, clearing banks, stockbrokers, accountants, surveyors, insurance brokers, lawyers and tax consultants
This article is far from comprehensive but is meant to give you a brief flavour of the areas that would be reviewed which might go some way to explain how the due diligence process could take some time to complete. Of course there is no guarantee that at the end of it the bidder will make an offer for the company but they should have a very good idea about the company, its financial standing and future prospects.