Consolidation – (Workshop 2) – DD
Outcomes
1. Ascertain in outline if there may be a need for competition law clearance on the transaction.
2. Identify some areas of risk revealed by due diligence investigations and suggest appropriate
action.
Different areas of business you want to conduct DD:
1. Finances – check the target any outstanding loans that need repayment + how much they
are worth or if they are subject to any change of control provisions if the event of an
acquisition
2. Management structure – if they see any inefficiencies and buyer thinks they can do a better
job by replacing management
3. Change of control provisions – If target has a number of customer contracts + customer
states if you get bought out by a buyer, then seller reserves the right to terminate the
contract because they were entering into this contract on the basis they only wanted to
contract with the target + no one else. And if all these customer contracts decided to
terminate then the buyer may see the target as less valuable and decide to walk away from
the transaction
Types of DD
1. Financial DD – accountants will be instructed to conduct financial DD (investigate
Commercial activities Management structure and employees, Taxation, Profitability, Balance
sheet strength, Accounting systems and policies, Premises, WC, cash-flow)
2. Commercial DD – done buyer themselves or senior management or may get a senior
commercial advisor if they don’t have experience (investigate target’s market position,
business plan, strategy, competitors, profitability, how valuable it is to investors)
3. Legal DD – done by lawyers to find out (terms on which target does business, discover
extent of its liability, confirm extent to which target owns assets it uses in business)
Types of legal DD Reports include:
Interim reports: used as a warning mechanism
Report ‘by way of exception’: matters that are unusual/unexpected
Full report: material contracts
DD used to find out how target does business, the extent of its liabilities, any potential litigation and
if it does discover any issues, will want a price reduction
Always think commercially, these are the problems and challenges I’ve found but these are the
solutions (always put a positive spin on things)
National Security and Investment Act (Not examinable but good to know)
About foreign investments in sensitive British companies/industries
Trying to stop foreign companies getting insight in British companies/industries with national
security issues/industry countries to get hold of company know-how (i.e. defence or arms
industry) to use against Britain (i.e., to build a weapon or top-end technology to spy on
members of public in Britain or to be a cyber security threat) or to get personal data
1
, Prep task 1 (likely MCQ)
EU Merger control and UK Merger control Q
Scenario
It is thought that the combination of Rethink’s advertising holdings and those of Alphacom Limited
would represent about 30% of the digital poster and billboard screens advertising market in the UK.
Based on a quick review could you let me know if you think the acquisition needs to be referred to
our competition department and what this might mean for the project timetable?
Turnover figures in Euros Worldwide and across the EU for EU Merger Regulation purposes
Worldwide Union-wide UK France Spain Italy
Group turnover of 2732m 103m 56m 70m 22m 11m
Benham Warstein
Inc
Alphacom Limited 28m 12m 16m 8m 4m -
(including its
subsidiary)
Total 2760m (2.7 115m = 72m 78m 26m 11m
billion) (turnover in
Euros
unlikely to
worry EU
competition;
if in billions
might be)
European merger control test
European Regulation 139/2004
Is there a concentration? = An acquisition is a ‘concentration’, as it amounts to the taking of control
(Article 3) – applies here
Does concentration have union dimension?
Article 1(2): Higher threshold test
the combined aggregate worldwide turnover of all the undertakings concerned
exceeds €5,000 million (or 5 billion); and
the aggregate Union-wide turnover of each of at least two of the undertakings
concerned exceeds €250 million. (Need both of these tests to satisfy “and” test)
On facts, purchaser’s group and target (all the undertakings) worldwide turnover
does not exceed 5,000 million as Benham Warstein Inc + Alphacom (including
subsidiary) has a worldwide turnover of 2760m and 2 of the undertakings do not
exceed €250 million
2
Outcomes
1. Ascertain in outline if there may be a need for competition law clearance on the transaction.
2. Identify some areas of risk revealed by due diligence investigations and suggest appropriate
action.
Different areas of business you want to conduct DD:
1. Finances – check the target any outstanding loans that need repayment + how much they
are worth or if they are subject to any change of control provisions if the event of an
acquisition
2. Management structure – if they see any inefficiencies and buyer thinks they can do a better
job by replacing management
3. Change of control provisions – If target has a number of customer contracts + customer
states if you get bought out by a buyer, then seller reserves the right to terminate the
contract because they were entering into this contract on the basis they only wanted to
contract with the target + no one else. And if all these customer contracts decided to
terminate then the buyer may see the target as less valuable and decide to walk away from
the transaction
Types of DD
1. Financial DD – accountants will be instructed to conduct financial DD (investigate
Commercial activities Management structure and employees, Taxation, Profitability, Balance
sheet strength, Accounting systems and policies, Premises, WC, cash-flow)
2. Commercial DD – done buyer themselves or senior management or may get a senior
commercial advisor if they don’t have experience (investigate target’s market position,
business plan, strategy, competitors, profitability, how valuable it is to investors)
3. Legal DD – done by lawyers to find out (terms on which target does business, discover
extent of its liability, confirm extent to which target owns assets it uses in business)
Types of legal DD Reports include:
Interim reports: used as a warning mechanism
Report ‘by way of exception’: matters that are unusual/unexpected
Full report: material contracts
DD used to find out how target does business, the extent of its liabilities, any potential litigation and
if it does discover any issues, will want a price reduction
Always think commercially, these are the problems and challenges I’ve found but these are the
solutions (always put a positive spin on things)
National Security and Investment Act (Not examinable but good to know)
About foreign investments in sensitive British companies/industries
Trying to stop foreign companies getting insight in British companies/industries with national
security issues/industry countries to get hold of company know-how (i.e. defence or arms
industry) to use against Britain (i.e., to build a weapon or top-end technology to spy on
members of public in Britain or to be a cyber security threat) or to get personal data
1
, Prep task 1 (likely MCQ)
EU Merger control and UK Merger control Q
Scenario
It is thought that the combination of Rethink’s advertising holdings and those of Alphacom Limited
would represent about 30% of the digital poster and billboard screens advertising market in the UK.
Based on a quick review could you let me know if you think the acquisition needs to be referred to
our competition department and what this might mean for the project timetable?
Turnover figures in Euros Worldwide and across the EU for EU Merger Regulation purposes
Worldwide Union-wide UK France Spain Italy
Group turnover of 2732m 103m 56m 70m 22m 11m
Benham Warstein
Inc
Alphacom Limited 28m 12m 16m 8m 4m -
(including its
subsidiary)
Total 2760m (2.7 115m = 72m 78m 26m 11m
billion) (turnover in
Euros
unlikely to
worry EU
competition;
if in billions
might be)
European merger control test
European Regulation 139/2004
Is there a concentration? = An acquisition is a ‘concentration’, as it amounts to the taking of control
(Article 3) – applies here
Does concentration have union dimension?
Article 1(2): Higher threshold test
the combined aggregate worldwide turnover of all the undertakings concerned
exceeds €5,000 million (or 5 billion); and
the aggregate Union-wide turnover of each of at least two of the undertakings
concerned exceeds €250 million. (Need both of these tests to satisfy “and” test)
On facts, purchaser’s group and target (all the undertakings) worldwide turnover
does not exceed 5,000 million as Benham Warstein Inc + Alphacom (including
subsidiary) has a worldwide turnover of 2760m and 2 of the undertakings do not
exceed €250 million
2
