Merger and Acquisition

Introduction to Financial Statements

Business Conditions
The process: what we buy and sell? What infrastructure is required?

The Financial Position (Balance Sheet)

Working capital: daily operating activities
Long term asset: value of infrastructure and property

The Statement of Profit or Loss (Income Statement)

Gross margin: net sales minus the cost of production and distribution.
Net margin: profit after paying administrative expenses

The Statement of Cash Flow

Types of cash flow: Operating, Financing, and Investing
Porfolio approach: match inflows with outflows
Asset Acquisition and Equity Acquisition

Asset acquisition
Purchase of a selection of tangible or intangible assets. No assumption of
explicit or implicit liabilities. No change in ownership or control. Taxation
athorities may levy capital gain or other sales transaction obligations.

Equity Acquisition
Purchase of equity control. Full assumption of all assets and liabilities,
tangible and intangible, explicit and implicit. Acquirer assumes full right of
ownership and control over acquired firm. Taxation authorities may levy
assessments againts the expanded capital base of the combine entity.
FINANCIAL DUE DILIGENCE
Definition?
PWC: ensure that the financial information of the target business reflects
the current, sustainable run-rate of the business and can uncover any
hidden risks or opportunities to help maximize the value of the deal. By
having analyze and validate key valuation assumptions, we can focus
attention on the factors in the business that will be critical to its future
success.

Deloitte.: Financial due diligence is conducted to support deal decision

making, negotiating, and eventually, post-announcement planning and
execution.
FINANCIAL DUE DILIGENCE
Focus Area?
Investigate Valuation Consideration
Quality of earning
Indentify unusual or non-recurring adjustments
Significant operating and financial trends
Bridging operating periods

Analyze the Technical Application of GAAP

Understand accounting implications of potential deal

Gain Understanding of Business, Operations, and Balance Sheet

Working capital and other purchase price adjustment mechanisms
Treatment of debt and other liabilities
Conduct of business between signing and close
Regulatory issues
Representations and warranties, indemnification provisions
FINANCIAL DUE DILIGENCE
Focus Area?