Buy-Side Diligence: Understanding the Target Business, Diapositivas de Finanzas Corporativas

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Financial Due Diligence

Overview

February 2016

www.pwc.com

PwC Deals Practice Overview

3

Buy-Side Diligence - What is buy-side

diligence and what does PwC do on buy-

side diligence engagements?

4

Buy-Side Diligence – How does due diligence assist the buyer?

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• Attempts to balance the initial information disadvantage against the seller
• Assist in the decision process by confirming the existence of any “red flags” or “black holes”
• Assist with the valuation (enhancing the understanding of the target business; identify and understand critical success factors; underlying reality of historical track record; sustainability of profit and cash flow generation; assessing normalized EBITDA; providing opinions on the target company’s current status and prospects; and calculating key risks and sensitivities)
• Assist in the bridge of Enterprise Value to Equity Value − Net Working Capital − Net Debt
• Assist in formulating negotiations
• Assist in reviewing SPA documents (representations, warranties and indemnities, disclosure schedules, purchase price adjustment mechanisms)
• Provide opinions of the quality of the management team, and specifically the accounting and finance departments
• Consider focus of post acquisition integration

Quality of Earnings Overview (1 of 3)

7 The primary purpose of the Quality of Earnings (“Q of E”) is to normalize EBITDA to assist clients with valuation, financing and establishing the purchase price Client’s use of Q of E for Acquisitions

• Establish baseline EBITDA to help model and value the business
• Assessment of EBITDA levels appropriate for financing purposes, as applicable
• Depending on the type of deal, Q of E could impact ultimate purchase price PwC’s Quality of Earnings Analysis
• Reconcile EBITDA to audited income statement and interim results
• Understand and evaluate appropriateness of management adjustments to reported EBITDA
• Identify items impacting valuation and financing:
• Non-recurring transactions
• Correction of an error or timing issues
• Non-cash transactions
• Pro forma adjustments

Quality of Earnings Overview (2 of 3)

8 Common types of Quality of Earnings adjustments include the following: Type Example Non-recurring transactions

• “One-time” transactions such as legal settlements, unusual transactions, etc.
• Major restructuring initiatives
• Facility closures / moving costs Correction of an error or timing issue
• Inappropriate revenue recognition
• Inadequate reserves (normalized “run-rate” expense)
• Improper cut-off and “roll-over” impact of accounting for transactions
• Inappropriate GAAP or accounting policies Non-cash transactions
• Equity-based compensation (stock options)
• Equity income from affiliates and joint ventures / minority investor expense
• GAAP pension and post retirement benefit charges
• Capitalized internal labor, straight line rent, etc. – replace with cash costs
• Release of reserves (bad debt) Pro forma adjustments
• Acquisitions and / or dispositions completed in the review period
• Stand-alone costs and carve-out issues
• Recent transactions with cost savings opportunities, changes in key contracts, etc.
• Synergies resulting from proposed transactions

Debt-Like Items Overview (1 of 2)

10 The debt-like items assessment helps to highlight potential reductions to enterprise value and cash flows Client’s use of Debt-like Items for Acquisitions

• Source of negotiation points with the Seller
• Consider debt-like concepts in the definition of “Indebtedness” in the purchase agreement
• Highlight additional cash flows that impact client’s model PwC’s Assessment of Debt-like Items
• Attempt to measure the value of future non-operating cash flow
• Schedule out the reported debt at the most recent balance sheet date
• Provide timing of future cash commitments over future periods

Debt-Like Items Overview (2 of 2)

11 Common types of Debt-Like considerations include the following: Type Example Adjustments to reported debt

• Prepayment penalties
• Accrued interest
• Discounts on issued debt
• Capital lease obligations
• Trapped cash / foreign cash Obligations to pay cash with no additional benefit to the Company
• Litigation, environmental claims
• Target’s transaction related costs and fees
• Contingent consideration from previous acquisitions
• Deferred compensation
• Restructuring liabilities Obligations that may not result in cash outflows during client’s investment horizon
• Unfunded pension, post-retirement and self-insured liabilities
• Contingent liabilities (e.g., tax exposures)
• Deferred revenues Commitments and Contingencies
• Operating lease obligations
• Employment / consulting / supply agreements (e.g., change-in-control provisions)
• Minimum purchase agreement
• Letters of credit

Net Working Capital Overview (2 of 2)

13 The buyer and seller have competing objectives with respect to establishing the NWC “target” Buyer Seller

• Maintain or possibly reduce purchase price
• Most concerned with getting normal or appropriate level of working capital
• GAAP generally more advantageous than consistency
• Bias: Target as high as possible, based on GAAP
  • Maintain or possibly increase purchase price
  • Most concerned with no downward purchase price surprises
  • Consistency generally more advantageous than GAAP
  • Bias: Target as low as possible, based on consistent accounting policies

Buy-Side Diligence – Phase I pre-exclusivity

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Call from client: “we

need a team”

Management

presentation

Discussions with

target mgt.

1 st^ draft report

(often initial

observations or

“red flags”

focused) Exclusivity

CIM or OM

Start data room

field working

Bid submitted by

client

Q&A Process

Appendix

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PwC Deals Practice – Boston Office

17 The PwC Deals team in Boston is the second largest in the PwC network, behind only New York Metro, consisting of 28 partners and a total staff of 173. It is also the largest of the major accounting firms in Boston. Services

• Financial
• Capital Markets & Accounting Advisory
• M&A tax
• Valuation
• Commercial / strategy
• IT and Operational
• Regulatory Compliance
• Risk Management
• Divestiture Services Goals
  • Execute effective and integrated due diligence to identify issues and opportunities and maximize deal value.
  • Equip clients with added insight to negotiate Sale and Purchase Agreements.
  • Develop day-one readiness and near term actions needed to start adding value to target companies. Staff level Financial Cap markets & accounting Tax Valuation HR M&A Advisory Total Partner 9 5 5 3 1 5 28 Director 8 5 4 2 2 8 29 Manager 10 7 2 6 1 16 42 Senior Associates 15 11 9 14 2 23 74 Total 42 28 20 25 6 52 173

What is Financial Due Diligence?

19 What do we do?

• Help corporate and private equity clients navigate transactions, both acquisitions and divestitures, to increase value and returns.
• Assist on a range of transactions from small and mid-sized deals to the most complex transactions, including domestic and cross- border acquisitions, divestitures and spin-offs, capital events such as IPOs and debt offerings, and bankruptcies and other business reorganizations.
• Allow our clients to expedite deals, reduce risks, and capture and deliver value to stakeholders, while quickly returning to business as usual.
• Reduce risk by identifying issues early. Financial Due Diligence Strategy Insurance Due Diligence IT/ Operations Due Diligence M&A Tax & Structuring Commercial Due Diligence HR Due Diligence

PwC approach to Due Diligence

20 Our approach to due diligence is collaborative to keep clients informed of real-time issues, issue- focused to remain efficient, and flexible to adapt to the transaction-specific circumstances at hand. While every transaction is unique, a typical due diligence engagement involves:

• Review of data room materials and compilation of a supplemental request list;
• On-site diligence team with management to interview and collect information;
• Reading audit work papers and holding discussions with the audit team;
• Reading and analyzing key source data, including audited financial statements, confidential information memorandum, significant contracts, management reporting packages, trial balance detail, revenue, cost and price-volume detail, balance sheet detail, reserve roll-forwards, debt documents and cash flow statements, among others;
• Reviewing employee census data and trends, labor contracts, etc.;
• Analysis of key drivers as defined by management or client, key contract wins and related projections;
• Analysis of the quality of earnings and assessment of management’s proposed adjustments to reported EBITDA;
• Identification of debt-like items and off-balance sheet commitments, including potential tax exposures;
• Analysis of historical net working capital trends and recommendations for establishing the “peg” for the Sale and Purchase Agreement working capital mechanism; and
• Reading and commenting on the Sale and Purchase Agreement.