CHECKLIST FOR ACQUIRER COMPANY

A. Organizational details of the target company

I. History of business and capital structure

1. Date of incorporation
2. Date of commencement of business
3. Description of capital structure authorized and issued, paid-up capital, reserves and
major shareholders.
4. Brief history of development of business
5. Current operations and principle products
6. Market reputation
7. Group details : subsidiary companies, overseas interest, geographical analysis of
assets.
8. Trade agreements, if any and details thereof.
Note:- Attach copy of Memorandum & Articles of Association of the company & Annual
Accounts Reports, copies of audited Balance Sheet and Profit & Loss Account.

II. Objective and strategy

1. Overview of industry in which the company operates.
2. Brief description of company's objectives.
3. Companies strategies covering : marketing, manufacturing and personnel aspects.
4. Dependence on and status of Research and Development.

III. Markets and competitors

1. Market segments and market shares.
2. New market
3. Involvement in any declining markets
4. Future plans, proposed new products, research and development.
5. Names of principal competitors, comparative details of their products, services and
organizational structure.
6. Relationship with governments and government agencies, effects on the companys
markets of any relevant legislation.
7. Possibilities of new marketing opportunities to the acquiree arising from the
acquisition.

IV. Management aspects
1. Board of Directors, their brief particulars, name, age, experience, and qualifications.
2. Company's management organization chart
3. Details about top executives, name, age, years of service, qualification and position
held. Experience before joining the company, present salaries and other forms of
remuneration.
4. Details of service agreements and pension scheme.
5. Policy towards training, placements and recruitment's and replacements.

V. Production details
1. Description of manufacturing processes.
2. Estimated utilized capacity, scope for utilization of spare capacity or increasing
capacity.
3. Quality of plant and equipment.
4. Factory and production layout.
5. Sub-contracts: Nature and amount of work sub-contracted to outside firms; the
reasons for sub-contracts; risks to the company of failure of sub-contractors; scope
for further sub-contracting.
 6. Ownership of patents, tools and dies relating to sub-contract work.
7. Possibility for new technology and impact on production process of the company or
its major competitors.
8. Relationship between fixed and variable costs in the total unit cost of each product on
manufacturing line.

VI. Purchasing
1. Particulars of raw materials used and principal suppliers.
2. Price fluctuations status: Prices of raw material are comparatively stable or volatile.
3. Details about suppliers for imported items. The rate of import duty, time taken for
delivery and any special settlement terms.
4. Terms of purchases, and significant forward purchases, and significant forward
purchase commitments for--
1. imported material.
2. Indigenous supplies.
5. Difficulties encountered in supply position of raw materials in past and expected in
future.
6. Alternative arrangements in the event of shortage of supplies of raw materials.
7. The rate of import duty, time taken for delivery and any special settlement terms,
control of prices / supply of raw materials by government departments, or under trade
associations or cartels.

VII. Sales and marketing arrangements

1. Selling arrangements, sales promotion methods, export methods and distribution
outlets.
2. Terms of agreements with selling agents.
3. The basis used in fixing selling prices and the extent and rationale sales price
discounting.
4. Government controls on selling prices or trade associations, etc.
5. Productwise major customers.
6. Geographical coverage of market.
Training for selling staff or agents.

VIII. Land and building and office premises

1. Description of land, buildings and office premises; types of construction; freehold or
leasehold; whether leased and, if so, terms of lease, general conditions, repairs and
maintenance responsibility.
2. The location of factories, administrative and selling offices or depots.
3. Site areas and floor space; space available for expansion.
4. Local governments restrictions or approvals, if any, required for developing the
present sites under any provincial or Central legislation.
Accessibility to road, rail, air, sea, canal transport facilities with site plan illustrations.
5. Particulars of cost of construction of the factory premises; date of erection; if
purchased by the vendor as already constructed building, the price paid and original
cost, if known.
6. Details of any professional valuations done.
7. Whether or not premises are in a development area or enterprise zone.
8. Potential for cost savings through rationalization or space or energy savings.
9. Insurance arrangements.

IX. Particulars about employees

1. Total number of employees at factory site, office locations, and different departments
on full time, part time, male/female.
2. Status of industrial relations, details of strikes and other disturbances date-wise.
3. Total monthly payments towards salaries and wages.
 4. Details of pension schemes, provident funds as applicable.
5. Fringe benefits and welfare services (canteens, sports facilities, etc.)
6. Recruitment policy; training facilities.

X. Financial management and control

1. Financial planning and budget control areas.
2. Performance monitoring against budgets and plans; responsibility for variances and
revisions to forecast management reporting of financial results, etc.
3. Responsibility of Finance Managers and their functions.
4. Management of foreign exchange risks; use of future markets.
5. Investment Policy.

B. Operational data and cash flow of target company

1. The following information is generally required for a period of atleast five
years about the target company :-
1. Company's accounting policies.
2. Sales.
3. Other Income - details of royalties, management and technical fees,
service fees, service fees, rents, income from trade and other
investments.
4. Cost of sales - analysis of material, labour and production overhead
costs. Review of standard or other costing procedures, accuracy of
management accounts and integration of variances.
5. Gross profits.
6. Overheads-analyze by main categories, trends.
7. The company's break-even point. (Expand where multi-division or
multi-product)
8. Depreceiation and amortization -basis, rates, position where
revaluations have been made.
9. Treatment of inter-company profits and charges.
10. Interest and other costs of borrowing; income gearing effect of
exercise of any conversion rights.
11. Taxation - current and deferred taxation, impact of overseas taxation.
Appropriations - dividends, cover for dividends, any other
appropriations during the period, any restrictions on distributions.
12. Geographical analysis of profits, remitability of profits retained
overseas.
13. Profit and cash flow forecasts including accuracy of past forecasting,
assumptions and basis used and factors which affect the forecast.
14. Utility of the forecasts is in company's strategic planning.
15. Significant changes since last audited accounts.
2. Details of capital employed
1. Deployment of tangible assets.
2. Recent valuations, if any.
3. Basis adopted for providing depreciation/amortization of each main
category of assets. Any recent changes in the basis of providing
depreciation.
4. Review of depreciation rates used compared with other similar
business.
5. Insurance particulars.
6. Brief description of assets, their cost and depreciation.
3. Status of intangible assets
1. Details of registration and particulars of important patents, trade
marks, designs and secret processes.
 2. Details of goodwill how acquired, whether arising on consolidation,
cost, amounts written off, current value.
3. Basis adopted for writing off the capital cost.
4. Investments
1. Particulars of date purchased; holding equity and other securities.
2. Income earned from investments.
3. Present market values, valuations, future prospects.
4. Nature of any business relationship with investees; details of material
transactions.
5. Any restrictions on realization of overseas interests.
5. Stocks inventories
1. Basis adopted for valuing stocks.
2. Particulars of any long-term work in progress and basis for the taking
of profit.
3. Basis used in arriving at stock quantities. How stock quantities have
been verified and particulars of procedures in force.
4. Status of slow-moving and obsolete stocks.
6. Debtors
1. Particulars of debtors arising out of domestic sales and export debt,
number of accounts, details or major balances, maturity wise
classification.
2. Details of the provisions for bad and doubtful debts.
3. Credit control methods in use.
4. If doing hire purchase trading, the basis adopted for taking profits on
open contracts.
5. Details of other main receivable.
7. Cash at bank and in hand
Summary of main items and set off arrangements.
1. Details of other main receivable.
8. Creditors details
1. Number of trade accounts; details of larger balances and names of
main suppliers.
2. Usual credit period allowed/taken - details.
3. Bank overdraft facilities - details.
4. Terms of hire purchase finance.
5. Guarantees, contingent liabilities, discounted bills , litigation pending.
6. Institutional loans and Banks' long-term borrowings, dates of
repayment, currencies, interest rates, security and details of any
conversion options.
7. Rate of interest charged on bank borrowings or loans from financial
institutions.
8. Details of security given to creditors both at the balance sheet date
and at present.
9. Provision for liabilities, tax and other charges
1. Details of potential liabilities like deferred taxation.
2. Details of provident fund and family pension commitments.
3. Provisions for warranties and guarantee costs. Past experience
warranty and guarantee costs.
4. Any tax planning schemes used in the past and assessment of any
resulting benefits.
5. Any anticipated future legislation affecting profitability and liability
commitments.
10. Management Information system
1. Use of computers and annual costs for use of computers costing
system, according functions and internal control.
 2. Tax savings if opted to purchase assets rather than exchange of
shares.
3. Availability of allowance for tax losses.
4. Stamp duty and savings in payment of stamp duty.
5. Capital gains tax.
6. Steps necessary to maintain continuity of business.
C. Title investigation and searches
1. Full details of encumbrances created on movable and immovable properties.
2. Report of searches in the office of registrar/sub-registrar of Assurances, Registrar of
Companies, Civil Courts, Revenue Courts, Municipal Offices, etc.
3. Advocates certificate about title and result of researches.
4. Restrictions placed in loan documents of banks and financial institutions or debenture
trust deed on disposal of assets and further borrowings or structural change in
company management, etc.

CHECKLIST FOR IDENTIFYING TARGET

What is the need for creating a checklist for identifying target companies?

Check list gives those making the acquisition decision (the promoters, professional advisors,
board of directors, etc.) a common blueprint for finding and evaluating acquisition
candidates. It is essential to describe what one is looking for carefully so that search efforts
are well directed and the possibility of missing qualified targets minimized. Developing a
checklist of acquisition criteria can also bring strategic plan more clearly into focus. In
additions checklist helps your advisors/investment bankers contact potential sellers and
provide information about what you’re looking for and what are the essential critical factors
and non-negotiable terms, if the deal has to go forward.

How to go-about to develop acquisition criteria?

Some of the process steps are;

•The first step in developing acquisition criteria is examining your company strengths and
weaknesses. You may think you know strengths and weaknesses of your company better
than anybody else. May be true or not, this step help buyers to examine themselves
adequately and consequently develop appropriate acquisition criteria.
•Review of strategic plan. Where do you want your company in three/five years? What will it
take to get there? Remember that a good strategic plan is not static. It evolves as the
company, industry and overall economic climates change.
•Once it is clear why you want to acquire and to achieve what, the next step of listing the
attributes you’re seeking in an acquisition candidate becomes that much easy. No target will
have all the attributes/qualities you want but comprehensive checklist will facilitate that key
attributes you are seeking in a target are not sacrificed in the chase.
Each acquisition is unique and characterized by a particular set of needs of the acquirer. But
the following guidelines may help the acquirer to sharpen and develop attributes one is
looking for.
a)Is the purpose of acquisition to diversify? Are you looking for a business similar to yours?
b)Number and strength of competitors. If the acquisition is for diversification, who are the
target’s competitors? Are they gaining or losing market share?
c)Product/Service Niche: Is the target has a unique niche in a particular industry either in
terms of a product, or service?
d)Market strategy. If the acquisition designed to increase market share, need to be clear,
which particular segment of the market you want to capture? Do you want to diversify and
expand your market reach?
e)Level of sales and profit margin. Are you looking for a business with smaller volume and a
higher margin or a company with a higher sales volume than yours?
f)Geographic location. Is that the only acceptable location? Will any efficiencies of scale
materialize only if the target is within geography? Companies that are geographically
convenient to each other and, that if combined, would present shareholders with a huge
potential for cost savings.
g)Can the target margins expandable? Generally speaking if company grows its revenue
base, it develops economies of scale. Does the target have the potential to develop these
economies of scale and increase margins? Is the target’s cost structure in line and have a
viable plan to grow revenue.
h)Solid Distribution Network. What good is a product if it can't be brought to market? Do your
networks and those of your target complement each other? Can you combine networks to
lower distribution costs?
i)Trademarks, patents or proprietary technology. Do you want to acquire trademarks or
patents to increase the price you can charge for your products or to increase your market
share? Do you have proprietary technology that could be deployed by the target’s operations
or to improve product quality?
j)Financial metrics of the target. Additional financing needed to acquire the target. How much
pre-acquisition leverage of the target acceptable? What are the borrowing costs of the target
and can it be financed, post acquisition at lower cost? Target companies could be more
profitable if their debt loads refinanced at a more favorable rate.
k) Has the equipment been well maintained? Is it paid for?
l)Range purchase price and financing terms. How much can you pay? Are you looking for an
earn-out payment structure? What financing resources will you use? Does the company
have undervalued assets and whether that can be used as collateral for financing?
m)Capital structure of the target. Generally speaking clean capital structure is preferred. If
you want the acquisition to go forward on a timely basis and with ease, be wary of
companies with a lot of convertible bonds or varying classes of common or preferred stock,
especially those with super voting rights. Such overhang capital structure presents the risk of
significant dilution and presents the possibility that some pesky shareholders with differential
voting rights might try to hold up the deal.
n)Management bandwidth. Can current management have bandwidth to assume
responsibility for the target’s operation? Is there a need to retain existing management after
the acquisition? Are there specific management competencies you need to complement your
business? Is the target company has good management team? Good management implies
that the company's facilities are probably in good order, and that its customer base is
content.
o)Clean track-record/operating history. Be wary, if target company for instance, previously
filed for bankruptcy, has a history of corruption, pending legal cases relating to
environmental issues etc. Why acquiring unknown risks?
p)Reputation. Are you looking for a business with a strong reputation for high quality? Do
you need name recognition?
q)Need to check labour agreements. Are there any collective bargaining agreements. Would
this acquisition jeopardize relationship with a labor union?
r)Regulatory and liability issues. Will the acquisition come with lot of regulatory compliance
issues? Are there proposed changes in safety or environmental regulations that affect target
industry? Will the target have difficulty complying? Can the target help you comply with new
regulations in your industry?
s)History of Enhancing Shareholder Value. If the target is a listed company, has the target
company been proactive in telling its story to the investment community? Has it repurchased
its shares in the open market? Is the target has ability to work as a standalone to handle
effectively the investor relations and public relations? It is good to acquire companies that
are able to enhance shareholder value.
This checklist is not exhaustive but only illustrative to enhance the research process and to
help identify characteristics that may be attractive to potential suitors.
PRICING
Checklist for acquirer company

Pricing is very critical in any M&A deal and as such utmost rigorous pricing and due
diligence investigation available under the circumstances surrounding the specific
transaction. need to be carried out.
1. Carry out where required, have the historical and projected financial statements of
the target company restated up or down in accordance with the provision of the
buyers accounting system. Typical areas of inquiry include Inventories, Personnel
Property, Plant equipment and the impact of the transaction on projected earnings
and cash flows. Pay particular attention to the above in cross border transactions
where the accounting conventions vary materially.
1. Under take comparative company analysis. Pick the comparative companies
properly. Be sure there is a sufficient market and financial data available to
make these companies appropriate for comparative company purpose.
2. If the target is in a country outside the Buyers Country and where no good
comparative companies can be found, pick the best possible array of
comparatives by using comparatives drawn from country nearby to the target
and adjusting investor appraisal ratios and those of the targets home country.
 
2. Compare the financial performance of the target company on an historical or project
or reconstructed basis with the financial performance of the comparatives using all of
the important ratios.

1. Some important ratios are ; profit margins, return on equity, return on assets,
growth in revenues and profits, debt equity, working capital and quick ratios.

2. Industry-specific ratios and data are also need to be used. For example for Air
lines industry revenues per passenger etc.
 
3. While choosing PE ratios utmost care need to be excercised in picking an
appropriate price-earnings or price-cash flow multiple.

1. Choose P-Es that reelects a period appropriate to the business under scrutiny
P-Es based on average three or five years earnings for business in Cyclical
industries, and latest 12 month or projected earnings for growth companies,
or companies that have recently and materially changed the nature of their
businesses.

2. Weigh the results under the earnings and assets tests properly

3. Pick an appropriate premium for control.

 Use relatively recent transfers of control for companies in the same
general line of business.
 Use general data on premiums for control.
In using the premium, give due recognition to historic and current results and
projected earnings for the targets company.
 On a stand-alone basis.
 Within the corporate framework of the buyer.
 Within the corporate framework of a competitive bidder.
  
4. While using Pay back analysis pay attention to
o The assumption giving rise to the projections should be realistic in terms of
the target companys projected growth or lack of growth.
o Carry out incremental costs or benefits.
 Include additions funds required for plant, equipment, sales force,
R&D, and so on.
 Give consideration to the scope/ability to dispose of nonessential
assets to generate cash

5. Identify and workout potentially beneficial aspects of the transaction in terms of

o The positive effects of business synergy in R&D, procurement, marketing,
and so on.
o Cost reduction through elimination of redundant property, equipment, or
personnel.

6. Consider at least three scenarios say conservative, optimistic, and average.

7. Consider scenarios of the target company both on a stand-alone basis and within the
framework of the buyer company.

8. In a cross border transaction consider characteristics unique to international

transactions
o Exchange controls
o Applicability of local laws to the business relationship
o Cultural differences
o Differences in legal systems
o Export controls
o Currency fluctuations
o Tax effects of repatriation of earnings
9. Asset and liability analysis examine
o Are receivable really receivable? How collectible are they? How fast they are
collectible
o Are marketable securities immediately convertible to cash or is the holding of
such securities so
o large in relation to the market for them or the trading in them is thin and need
to be discounted for lack of marketability
o How fast is the inventory turning?
o Consider fixed assets value in the light of the value of such assets on a fully
depreciated basis, on a going concern basis, on a replacement basis and on
forced liquidation basis
o Consider fixed asset values as a part of buyers opportunity cost. That is the
value of assets in place instead of building them.
o As regards intangibles are concerned
o Value trained workforce and the competence of management
o Value of goodwill
o Value of customer connections
o Value of patents, brand names, trademarks
o Mark current liabilities and long term liabilities to market. Also check
affirmative and negative covenants in loan agreements
o Examine Off-balance sheet liabilities and determine how price will be affect
10. Discounted cash flow analysis
o In selecting the number of years over which the net free cash flows are to be
discounted ,keep in mind the relative certainty of the projected cash flows and
the sensitivity of the final conclusion to the terminal value
o In selecting the discount rate, consider.
o Both the buyers and the targets cost of capital and also buyers opportunity
costs
o Use the discounted cash flow to generate an internal rate of return calculation
which may be used as a measure against company benchmark IRR

11. In selecting the approach to terminal value, keep in view

o Whether the relevant industry price-earnings or price-cash flow multiples have
been relatively constant or not
o Whether the perceived risk elements are likely to be the same at the end of
the discounting period as at the beginning
o Perform discounted cash flow analyses for the target on a stand alone basis
and as combined with the buyer