Due Diligence Process Research Articles

Economic Action Does Not Take Place in a Vacuum: Understanding Cisco's Acquisition and Development Strategy

The literature and common belief holds that the acquisition of high- technology firms in rapidly evolving markets normally results in failure. Cisco, however, has successfully grown through the conscious and deliberate use of acquisitions to become the dominant global networking equipment provider. The crux of our argument is that Cisco's success cannot be fully explained by economic and financial variables, or by acquisition target selection, alone. Managing social and organizational processes has been central to Cisco's success. Cisco's success is attributed to an active involvement by both the firm and its employees in its ecosystem. We explain the operation of Cisco's multiplex intelligence gathering function, and characterize it as a "high surface area strategy". This is followed by highlighting how Cisco's due diligence process treats human resource issues as central to calculating the true value of the acquisition. Whereas, most firms consider the process as complete when the decision to acquire has been made, this study explains how Cisco's integration process is staged to ensure that the core product development teams in the acquired firm suffer minimal disruption. Finally, Cisco's success is measured through the use of retention and market share data.

Hedge Fund Allocation with Survival Uncertainty and Investment Constraints

In this paper, we propose to study a hedge funds allocation problem. A typical feature of those alternative investments vehicles is their propensity to cease their activity after experiencing a distressing situation. We use an expected utility framework to integrate the hedge funds survival uncertainty and rely on the class of isoelastic functions to model the investor's preferences. The addition of investment constraints complicates the resolution of the optimal allocation problem. It is solved using a genetic algorithm that mimics the mechanism of natural evolution and is specifically designed to handle a set of non-linear investment constraints. We finally apply the genetic algorithm to analyze the impact of the survival uncertainty and of the investments constraints on the optimal allocation and on the certainty equivalent of hedge funds' portfolios. One observes in particular that the optimal portfolio weights are significantly affected when the survival uncertainty is taken into account. An out-of-sample analysis shows that when the survival uncertainty is introduced into an expected utility model, the use of tight investment constraints provides an interesting complement to the due diligence process in the absence of any a priori skills for detecting persistence in the hedge funds' performance.

CIVC PARTNERS ROUNDTABLE ON MANAGING PRIVATE EQUITY INVESTMENTS IN TURBULENT ECONOMIC TIMES

This roundtable brings together four representatives of CIVC Partners to discuss strategies for private equity investing in the current economic environment. As one of the seven private equity investment arms of Bank of America, CIVC Partners manages over $700 million in private equity capital provided exclusively by the bank. CIVC's primary investment focus is leveraged buyouts and growth equity investments in mid‐sized corporations in North America.Following a brief report on the state of the private equity market, the discussion begins with an “open book examination” of CIVC's response to the current market reality. From the fundamentals of their investment strategy to the pursuit of “relative values,” CIVC's partners explain how their approach attempts to deal with the reduced margin for error in equity investing. In the second half of the discussion, the partners describe their focus on portfolio company investing and the importance of the due diligence process in contributing to their track record.

Environmental Due Diligence

The rise of the due diligence process and the growing importance of environmental due diligence; the elements of environmental due diligence: pollution of buildings, soil and ground water — the law on protection against harmful emissions — the law relating to water and waste disposal — management systems and their significance — product-related requirements — insurance. Drafting a contract for the sale and purchase of a business; points to be taken into account from the seller's and the buyer's points of view and the scope for compromises.

Deconstructing Section 11: Public Offering Liability in a Continuous Disclosure Environment

DONALD C. LANGEVOORT [*] I INTRODUCTION Shortly after the Securities Act of 1933 [1] (1933 Act) became law, critics from the securities industry charged that the civil liability provisions created by Section 11 of the Act made it excessively draconian. Mandatory disclosure and prospectus delivery, even pre-clearance by a federal agency, were troublesome enough. However, strict liability to investors for issuers, and failure of liability for underwriters, accountants, officers, and directors for material misstatements in a registration statement, were quite another matter--making Section 11 the bete noire, in Louis Loss's words, of the legislative scheme. [2] Opponents ominously warned that the legislation would dry up American capital-raising. [3] Even though they were eventually proven wrong in that particular prediction, [4] the industry was right to see the threat of private civil liability as the engine that drives the 1933 Act. [5] Estimates in the finance literature suggest, for example, that a sizable portion of the unde rwriters' spread is a liability risk premium, [6] and lawyer-disseminated fear of liability casts a harsh shadow over the due diligence process. [7] In the late 1970s and early 1980s, concerns about the relationship between liability and capital-raising efficacy reappeared. Large, seasoned issuers were moving significant capital-raising transactions offshore, into the so-called Eurodollar market. Delays associated with the Securities and Exchange Commission (SEC) review and limits on publicity and marketing of domestic offerings were blamed. In response, the SEC introduced registration for large capitalization issuers via Form S-3 and modernized and expanded the availability of shelf registration, thereby permitting large issuers to move quickly to take advantage of market opportunities without excessive regulatory delays. [8] In the political process and in academic debates, however, the principal risk associated with speeding up the distribution process was readily identified. Disclosure quality is threatened by the de facto loss of opportunity for external due diligence by underwriters and others associated with the issuance from the ti me the decision to sell is made to the time securities are purchased by investors. [9] Underwriters thus found themselves in a world of de jure liability if there were misstatements or omissions; only a vague Commission rule, coupled with some informal suggestions for ex ante due as protection, seemed to suggest a more permissive standard of due diligence in such settings. [10] Today, few suggest that we should, or can, backtrack on liberalization of the 1933 Act. [11] Instead, regulatory efforts all point to the opposite: further expansion of the speed and limited disclosure responsibilities associated with large company capital-raising. [12] Yet, this simply focuses all the more attention on liability, and to this point, the Commission has suggested only minimal reform: clarifying the due diligence responsibilities associated with short-form offerings to take account of practicability concerns. Indeed, to the consternation of many, the Commission suggested expanding the kinds of issuer-generated information that would otherwise be subject to negligence-based civil liability under the 1933 Act. [13] This article is an effort to rethink civil liability in capital-raising transactions by large capitalization issuers. [14] After a brief digression about who should set liability standards, the article then addresses two related questions. The first deals with a natural question: Should not the primary regulatory effort for large issuers be to assure continuous disclosure in the secondary marketplace, given the far larger volume of such trading in that market compared to that in primary transactions? [15] Second, if we have developed a satisfactory regime of disclosure responsibilities for this setting, what more, if anything, in terms of liability protection, is needed when such issuers sell new stock into an existing market for their securities? …

The Due Diligence Process for Acquiring and Building Power Plants

The ultimate success of an acquisition bid for merchant power plants can hinge on the quality of the due diligence process that precedes the bid. To succeed, bidders must assemble a team comprising personnel from diverse disciplines who have strong project management skills.

Management Assessment Methods in Venture Capital

Venture capitalists employ a sometimes haphazard process for assessing senior managers of prospective new venture investments prior to making a final investment decision. There is a crying need for empirical research and practical theory to examine the assessment methods for human capital, and thereby assist the venture capital due diligence process. This article is the first to combine field research with theory from the fields of psychology and economics in an attempt to generate new theoretical and empirical insights.

Business unit strategy and acquisitions

Advises that strategic, financial and implementation analysis should be united into a single process of acquisition planning and due diligence. Accepts that acquisitions frequently destroy more value than they create. Recommends linking the underlying strategy, with the anticipated source of value, using figures to emphasize key points. Concludes this is a useful overview of acquisitions in the business strategy unit.

Intellectual Property, Due Diligence and Audits

SummaryDue diligence in this article refers to the process of examining a business which enables a potential purchaser to satisfy himself that the vendor owns the title to the assets to be sold and to determine whether the price proposed is reasonable, having regard to the risks that the purchaser may assume in acquiring the business. This article examines attributes of legal mechanisms used to protect intellectual property (IP) which must be considered in the due diligence process. It concludes with suggestions on how to create a ‘culture of confidentiality’ within a company to ensure IP is adequately protected.

Strategy, acquisitions and value

Acquisitions frequently destroy rather than add to value, especially where they are not managed well strategically. Strategic, financial and implementation analysis can be fruitfully integrated as a single process of due diligence. The value from acquisitions can be segmented according to the purpose of the acquisition to arrive at a value profile. Acquirers can then challenge whether they are likely to add value before, during or after the deal. The key assumptions underlying acquisition value (including the scale of the investment iceberg) can then be tested using a combination of strategic, financial and implementation tools (including scenarios and critical success factors).

THE CREATION AND FLOTATION OF NOVUS PETROLEUM LTD

Novus Petroleum Ltd listed on the Australian Stock Exchange on 24 May 1995 having raised $157.5 million of equity. It was the largest initial public offering (IPO) of an oil company ever undertaken in Australia, and the third largest equity-raising on the Australian market during financial year 1994-5.The creation of Novus involved the creation of a team of professional advisers comprising ANZ McCaughan (broker), Indosuez Australia (financial adviser), Ernst and Young (accounting and taxation adviser), Phillips Fox (legal adviser) and Fern Consultants (technical adviser). During the period from mid 1994 to May 1995, the team identified and procured a portfolio of producing and exploration assets (including shares in over 30 oil and gas fields); negotiated sale and purchase, underwriting, loan and other necessary agreements; wrote and issued a prospectus and performed the necessary due diligence and other processes involved with a public equity offering; and marketed the stock in the new company globally.The success of the IPO is attributed to having a very clear business focus and strategy, a diverse portfolio of quality assets, a strong and experienced management team, good earnings arithmetic and a strong balance sheet. Delivery of the success is attributed to the commitment and enthusiasm of the professional team involved with the float process.

A Due Diligence Process for Highly Leveraged Transactions

Abstract No abstract available.

Hybrid conjoint analysis: An estimation probe in new venture decisions

How venture capitalists select start-ups for financing has been an interesting topic for many researchers and practitioners. The underlying assumption is that people who make money investing in new businesses by assessing the proposals should be experienced enough to distinguish losers from winners. Our research study tested three models (self-explicated, conjoint and a hybrid—comprising the two previous ones—conjoint) in order to find out: 1. if these models could be applied to venture capital decision making and if so 2. to demonstrate the potential of conjoint analysis as a practical research method. 3. To test whether or not the characteristics of the entrepreneur, the product and the market replicate the venture capital decision. This research study confirms what normative literature on decision-making emphasizes: that in the first stage of an evaluation (screening), venture capitalists focus on a small subset of criteria in a non-compensatory process (i.e., an unacceptable value on one criterion cannot be offset by a high value of another one). The important criteria in this phase appear to be the entrepreneur's experience and the existence of a prototype for some decision-makers or unique features of the product for others. The screening step is more judgemental than analytic. In a second stage (the evaluation phase), however, venture capitalists end a detailed examination (due diligence process) by choosing the most preferred ventures through processes approximating compensatory rules; that is, a low but acceptable value on one criterion can be compensated by a high value on another. The most important criteria identified by the research in this second stage are criteria found in the previous stage, product gross profit margin and patent. Our research demonstrates agreement among venture capitalists in terms of one criterion to evaluate research proposals: managerial experience. As to the rest of the attributes tested, there was variation in the weights assigned to them. The findings of this pilot study also confirm the applicability of conjoint analysis as a research method in venture capital decision. The approach helps shed light on the decision rules applied, and permits the testing of previously researched criteria for predictive validity. The method has the advantage of retaining individual preferences and clustering them around venture capitalists' demographic and psychographic backgrounds (i.e., years of experience, type of education, life-style, and the like) or other types of information such as venture fund policies (size of the investment, type of industry, etc.). The major implication of the study for entrepreneurs is the importance of previous experience in the industry where they expect to develop their ventures, and a deep knowledge of the product (advantages over competition, technical, production, and cost feasibility) they are to produce and market. These are the factors that have the greatest influence on venture capitalists' evaluation of such projects.

Management buy-ins in the UK

In the mid-1980s, many UK venture capitalists developed investments in management buy-ins as an extension of their successful interest in the related area of management buy-outs. This paper presents the results of the first survey of the performance effects of a representative sample of 59 management buy-ins. The study reveals substantial restructuring following management buy-ins and also indicates that the performance levels after the buy-in are likely not to meet those originally intended. Extensive changes in product portfolios are reported. Management changes appear to be highly significant. Performance seems to be below that found in studies of management buy-outs and the extent of changes occurring appears to be considerably greater than in buy-outs. There seems in general to have been an underestimation of the extent of likely problems at the time the investment was being appraised, as indicated by the importance of “skeleton in the cupboard” type problems which subsequently emerged. Whilst this might call into question the thoroughness of the institutions' due diligence process, it may also reflect an asymmetric information problem that is greater in buy-ins than in buy-outs. There does appear to be a higher level of monitoring of buy-ins than for buy-outs.

Due Diligence: Its Importance, Impact, and Improbabilities

Summary. Due diligence affects all participants in the petroleum industry: investors, bankers, brokers, engineers, accountants, the government, and the companies raising money, acquiring properties, or merging. While many articles about due diligence have been published in financial publications, little is available in the petroleum engineering literature, This paper outlines the importance and impact of due diligence with checklists and examples from my experience as a securities analyst, investment banker, evaluation engineer, and expert witness or adviser. Introduction Due diligence may be the most important function in any oil and gas transaction involving raising money, acquiring properties. or merging companies. Due diligence can "make or break" a transaction or cause it to be restructured. If it is not properly exercised, everyone loses. SPE established voluntary standards for reserve auditing in Dec. 1979. While reserve auditing can be a part of due diligence, the two processes are not the same. In fact. no legal or dictionary definition exists of due diligence as it is practiced today by reserve-evaluation engineers. One attorney told me: "In a sense, [due diligence] is an ‘art form.' It is what you envision it should be for the application you have planned." Another attorney said it was planned." Another attorney said it was "everything you checked and everything you should have checked." In the Financial Products Standards Board's 65-Page Products Standards Board's 65-Page Standards for Oil and Gas Investments, "due diligence" is mentioned only briefly three times and is not defined in the glossary. However, this book and the Financial Products Standards Board's 16-page Standards Products Standards Board's 16-page Standards for Public Oil and Gas Programs have the most complete checklists that I have found for the due diligence process, except that they do not cover the broader responsibilities of the oil- and gas-evaluation engineer. My recommendation for a definition of the due-diligence process is the systematic review and verification of the information contained in oil- and gas-reserve evaluation reports, prospectus, or other documents used by one or more of the parties involved in the sale of stock, bonds, or interests in a property, an acquisition, a merger, or a bank loan. Due diligence includes reporting these findings and any other factors that may affect the proposed transaction to the client. The purposes of this paper are to clarify the oil- and gas-evaluation engineer's role in the due-diligence process and to illustrate the major issues and hazards involved. Ref. 1 provides more detail. Due Diligence Process and the Evaluation Engineer The only auditing standards for oil and gas reserves are those promulgated by SPE in Dec. 1979. These standards do not cover such key areas as the impact of the economic limit on reserves, product pricing, report preparation and contents, taxes, operating preparation and contents, taxes, operating costs, investments, contracts, and price escalations. As an extension of the current SPE reserves definitions. the Soc. of Petroleum Evaluation Engineers published Petroleum Evaluation Engineers published Monograph I-Guidelines for Application of Definitions for Oil and Gas Reserves in Dec. 1988. This guideline covers many topics not included in the reserve-auditing standards that are critical to a due-diligence investigation. Both can and should be used as tools in a due-diligence portfolio and are available from SPE. To see how the evaluation engineer fits into the due-diligence process, let's first look at the normal due-diligence responsibilities of the investment banker for public oil and gas offerings and mergers and acquisitions. Investment bankers have a dual responsibility: to conduct, or hire independent third parties to conduct, a due-diligence parties to conduct, a due-diligence investigation and report on the company and to follow subsequent events to ensure that the company performs its functions properly after the offering. The various engineering. geological, or accounting professionals who should take part in the different phases of due diligence for oil- and gas-related offerings are included in the following investment-banker responsibilities:The evaluation engineer and accountant should assess the quality and experience of management and staff.The evaluation engineer and geologist should evaluate the previous record of the general partner on a pretax-cash on cash basis.The evaluation engineer should audit company reserves or reserves to be acquired.An evaluation engineer with a background in operations should assess the quality of operations.The evaluation engineer, geologist, accountant, and attorney should review the offering. JPT P. 1097