41

Deloitte has extensive experience in all aspects of due diligence

and has been appointed to many major transactions in South
Africa, both by corporates and private equity rms.
The South African team is staffed by skilled nancial professionals and can draw on
the extensive resource base of the rm for industry expertise and experience as well
as any nancial, tax, legal, HR, IT strategy or consulting issues. We regularly access
the Deloitte global centres of excellence to ensure that we remain in the forefront of
developments in the due diligence eld.
Due diligence
Peace of mind in M&A
Our approach to due dilligence
Review Analyse Interpret
We will review information and analyse
the accuracy and reliability of such
information
We perform an analysis of information
to determine key business drivers, and
understand trends and uctuations in
the business
We interpret our results and make
recommendations for issues that have
been identied.
Report
Deloitte has a proven methodology to manage multi-disciplinary teams. Our multi-disciplinary approach ensures that all teams produce
one nal report, under the direction of one key project manager. We have access to industry experts both within and outside Deloitte.
The scope of a due diligence will depend on the size and complexity of the entity and the surrounding risks. We examine the
nancial aspects of a business, as well as its strategic and market position and future plans. The scope is designed in conjunction
with you and is based on our understanding of the risks inherent in the entitys business. In addition, we focus on the drivers
underlying the business model and black holes in order to facilitate your understanding of the issues relevant to the entity.
Our work normally results in a written report, providing an in-depth analysis of the business. Our reviews add real value by focusing
on the key matters. Our reports are concise, understandable and succinctly presented.
For more information,
please contact:
Karin Hodson
Partner, Corporate Finance -
Due Diligence
Tel: 011 806 5668
Email: khodson@deloitte.co.za
42
Financial Due Diligence (FDD)
In any acquisition, nancial due diligence is a vital process, enabling the purchaser
to obtain a comprehensive and expert assessment of the targets business history, its
strategic and nancial pulse, and, future projections and prospects. The focus is on
issues that could affect price, i.e. the valuation of the company.
On African and international acquisitions, Deloitte has a strong competitive advantage
because of its ability to utilise rm resources in foreign locations.
In a private equity acquisition, where management is generally retained, key due
diligence issues are:
sustainability of earnings
forecasts
working capital and capital expenditure
cash fow / debt
corporate governance
In a corporate acquisition, the target is generally incorporated into an existing
structure. Hence other specic due diligence issues include:
human resources
retrenchment
synergies
cost savings
In essence the scope of a nancial due diligence includes a detailed review and analysis
of the following:
Company overview structure and background.
Historical trading nancial performance, quality and sustainbaility of earnings,
key drivers of revenue and protability.
Current trading current performance and budgets.
Projections review of managements forecasts of protability and cash ow.
Historical cash ow working capital requirements, quality of working capital,
capital expenditure.
Historical assets and liabilities valuation and completeness of assets and
liabilities, guarantees, commitments, contingencies and net debt.
Accounting matters accounting policies, reconciliations, reliability of
management accruals and audit issues.
For more information,
please contact:
Karin Hodson
Partner, Corporate Finance -
Due Diligence
Tel: 011 806 5668
Email: khodson@deloitte.co.za
The Deloitte due
diligence team is
committed to adding
value to your transaction
by demonstrating
responsiveness and
fexibility throughout
the engagement and
working as a coordinated
team to help you achieve
your objectives.
43
Taxation Due Diligence
Taxation due dilligence aims at identifying all forms of tax risks associated with either
the purchase of shares or the sale of assets.
South Africa has an extremely complex tax regime, with numerous changes being
effected to the tax legislation every year. Therefore, taxation issues play an integral role
in all phases of any M&A transaction.
The focus of a tax due diligence is to identify, and to quantify material risks and assess
the likelihood of a realisation of these risks. In addition, the review attempts to provide
value added recommendations to the prospective buyer on how to address and control
specic risks identied.
Depending on the requirements of the client, we offer high level or detailed tax
due diligence reviews or only review specic risks identied by, or in conjunction
with the client.
We offer both purchaser and vendor tax due diligence reviews.
We utilise a wide range of professionals from the various specialist areas of our
extensive tax practice to perform the review. Each tax due diligence review is lead by a
team of M&A tax specialists who utilise and draw on the expertise from the following
specialist tax areas:
Corporate Tax
International Tax
Transfer Pricing
Value Added Tax
Employees Tax
Customs and Excise
Legal Due Diligence
A legal due diligence focuses on aspects of legal risk largely associated with the rights
and obligations of the target owing from litigation, employees, agreements and
corporate documents material to the running of a business. This review will cover:
Commercial agreements
Corporate structure
Powers and proxies
Borrowing and fnance
Assets and properties
Intellectual property (whether owned or licensed)
Information technology
Securities issued
Regulatory and competition
Litigation and disputes
Employment law
Employee relations
Employee benefts
Safety, health and environmental legal (SHE)
For more information,
please contact:
Helgo Rapsch
Director, M&A Tax Leader
Tel: 011 806 5324
Email: hrapsch@deloitte.co.za
Anne Casey
Director, Taxation
Tel: 011 806 5331
Email: ancasey@deloitte.co.za
Nazrien Kader
Director, Taxation
Tel: 031 560 7065
Email: nkader@deloitte.co.za
Le Roux Roelofse
Director, Taxation
Tel: 021 670 1639
Email: lroelofse@deloitte.co.za
For more information,
please contact:
Murray Dicks
Director, Legal
Tel: 011 209 6311
Email: mdicks@deloitte.co.za
Dean Chivers
Director, Legal
Tel: 011 806 5159
Email: dechivers@deloitte.co.za
44
Commercial Due Diligence
Positioned within the Deloitte Strategy division, a new and innovative specialisation
in commercial due diligence has been created the objective is to identify ways of
extracting the full potential benets of a merger.
With the experience of many mergers, Deloitte found that while nancial due
diligence offers the promise of post-merger synergies, they are seldom fully realised.
The commercial due diligence team sets out to nd out what the merging parties are
really good at and then proposes strategies for optimising these core competencies in
the merged operation.
Traditionally, merger parties look for operational synergies, cost cutting opportunities
and efciencies from streamlined resources. The real challenge, however, is to make
the sum of the parts substantially more than the whole and to identify synergies
beyond the obvious.
Technology Due Diligence
Technology is a vital part of the lifeblood of business today. IT is integral to effective
operations, management information and nancial reporting. IT is also frequently a
major component of operating and capital expenditure, thus, IT is a strategic resource
for management in extracting value during the M&A process.
IT Due Diligence
IT infrastructure should be included in the scope of any M&A due diligence, given the
relative dominance of IT in the assets of many corporates and the importance of IT
risks and controls to business performance.
Deloitte has a team of more than 200 people with deep IT expertise and IT due
diligence experience. The rms distinguishing feature its unique multidisciplinary
network - strongly supports the IT team, enabling it to share people, methodologies
and resources.
Deloittes IT due diligence will typically encompass a forward review of technology in the
future combined business and a detailed assessment of the IT environment including:
IT personnel
principal applications
systems management
outsourcing agreements
IT costs, hardware and software equipment and providers
networks
operating systems
databases
telecommunications network
IT and web security
disaster recovery / business continuity planning.
For more information,
please contact:
Chomel Minnaar
Manager, Consulting
Tel: 083 327 7369
Email: cminnaar@deloitte.co.za
For more information,
please contact:
Mike White
Director, Enterprise Risk Services
Tel: 011 806 5899
Email: mikwhite@deloitte.co.za
Cathy Gibson
Director, Enterprise Risk Services
Tel: 011 806 5386
Email: cgibson@deloitte.co.za
45
HR Due Diligence
Human capital due diligence is an important component of the overall due diligence
process, although it is often underestimated or undervalued. In addition, due diligence
often focuses too narrowly on historic fnancial performance. A multi-discliplinary
approach that includes human capital is far more powerful and revealing.
The fact is, personnel-related expenses are typically the major expense item on the
income statement of most companies correctly identifying signicant cost increases
and hidden liabilities could account for millions of Rand in a transaction.
Human capital due diligence specialisits have broad and deep experience in a wide
variety of areas much more so than HR generalists. Due diligence teams need to
look at legacy liabilities, such as pensions, post-retirement medical, healthcare and
insurance costs, parachute payments and deferred compensation plans to name just
a few.
It is integral to overall due diligence results for the human capital due diligence team
to work side by side with the accounting, tax, nance and legal diligence teams to
avoid duplication on issues that might overlap with legal and tax.
The HR people directly involved in the transaction are affected and it is difcult for
them to be objective, hence the Deloitte team offers objective project management
skills. HR due diligence includes a comprehensive analysis of all aspects of reward
including a full cost analysis of the HR transition, a complete assessment of the people
integration costs, an analysis of employee beneft equalisation and in the post-
merger phase, advice and support to align best practices and revised performance
management systems and incentives.
Representing Development Dimensions International (DDI), Deloitte offers a specifc
methodology and tools for creating competency proles and providing training, thus
bridging the gap where a deciency becomes evident in a transaction.
There is often a considerable gap between deal commencement and conclusion, and,
the transition needs to be managed carefully from a HR perspective. Consequently the
Deloitte HR due diligence team prefers to be engaged early in the process to:
examine the staff infrastructure
undertake a leadership structure assessment
identify the key talent you want to retain and, where appropriate, put golden
handcuffs in place.
For more information,
please contact:
Gabi Savini
Director, Human Capital
Tel: 011 517 4274
Email: gsavini@deloitte.co.za
The fact is, staff costs
are often the largest
expense in a company
and hidden liabilities can
account for millions in a
transaction.
46
Technical Due Diligence
Actuarial & Insurance Solutions
Actuarial & Insurance Solutions are the specialist insurance and actuarial
consulting group of Deloitte with ofces throughout Europe and Africa.
Our emphasis is on providing:
the very best actuarial and consulting people, techniques and thinking applied with
the right focus to the commercial imperatives of our clients
an analysis of the market, now and in the future and translating these changes
into nancial implications
quantifcation of risk patterns and risk drivers, not just for insurers but for fnancial
services organisations, utilising the best actuarial and business modeling software
in the world.
What is an Actuary?
An actuary is a fnancial problem-solver with a unique blend of mathematical,
analytical and business skills.
Accountants and auditors work with the past; they check the nancial transactions of
previous years to ensure that everything had been done properly. Actuaries, utilising
their mathematical and statistical skills, analyse past events, then assess present risks,
and nally model what could happen in future.
This allows the actuary to improve fnancial decision-making by developing models
with which to evaluate the current nancial implications of uncertain future events.
Mining Advisory Services
Deloitte Mining Advisory Services (DMAS) focuses on key issues within the mining
value chain, facilitating growth, optimisation and access for clients to new nancial
markets and investors.
The DMAS team consists of a unique combination of seasoned mining industry experts
who add signicant value to Deloittes core strengths in a highly specialised area.
In M&A transactions in the mining industry, DMAS services include:
Competent persons reports, i.e. fair & reasonable opinions
Technical and commercial mine due diligence
Valuation of mines
Beyond M&A, DMAS has an extensive product offering:
With the global resources market at an all time high, new mining opportunities are
continually being identied. DMAS enables clients to shorten their time to market and
to assist in building green elds mining operations or to optimise an existing mine.
DMAS personnel can validate current ore resource and reserve, signed-off to
internationally accepted standards.
For more information,
please contact:
Philip Kotz
Mining Advisory Leader
Tel: 011 517 4078
Email: philipkotze@deloitte.co.za
For more information,
please contact:
Andy Rayner
Director, Actuarial & Insurance Services
Tel: 021 670 1541
Email: arayner@deloitte.co.za
Deloitte provides
quantifcation of risk
patterns and risk
drivers, utilising the
best actuarial and
business modeling
software in the world.
47
The Deloitte team has industry experience to assist in a wide range of mining
related activities that will help improve client protability including:
- Ore-body management
- Mineral rights conversion
- Mining services and business optimisation
- Human engineering
- Mining risk management
- Environmental and earth sciences
Real Estate Services
Accommodating M&A activity
Corporate real estate is one of the largest components of a companys infrastructure
and can have a direct impact on operating margins and protability. It is generally
a signicant factor in strategic decision making particularly in M&A and related
transactions. Unfortunately, many companies treat corporate real estate as an
administrative rather than a strategic function.
Deloitte Real Estate Services (DRES) offers a multi-disciplinary offering in the M&A
environment:
Due Diligence on property portfolios identify and obtain all relevant property
data, property valuations through sworn valuers or an extrapolation model. Providing
property data for a data room. Financial studies on portfolio yields, maintenance
planning budgets and facilities management.
Data and site verication physical site audits to verify data.
Condition assessments condition assessments of the buildings and or property
to determine current state and future needs.
Disposal and or Acquisition manage the entire process of disposal and or
acquisition of property.
Lease audits lease audits to identify all onerous clauses and nancial obligations.
For more information,
please contact:
Wim de Villiers
Senior Manager - DRES
Tel: 011 517 4074
Email: wdevilliers@deloitte.co.za
Rehab
Environment
& Earth
Sciences
Business
Risk Mgmt
Human
Engineering
Mining
Optimisation
Project
Mgmt
Project
Planning &
Construction
Mining
Services
Mineral
Rights
Ore Body
Mgmt
Exploration Operational
Perceived
Value
Time
Grow Ore
Resource &
Reserve Base
Feasibility
Project
Building
Commissioning
Optimisation
Production
Build-up
0
Mature Start Up Mine Closure
Deloitte Mining Advisory Services
48
Space Optimisation portfolio strategy analysis after a merger and or acquisition
of property to optimise the usage, space and needs.
Location strategies research to identify the best locations of operations /
ofces.
General Support holding, development and investment strategies,
benchmarking and research and strategy formulation.
The full range of service areas offered by DRES spans the entire real estate lifecycle to help
companies plan, site and deliver facilities effectively, to manage real estate efciently, and
to reduce occupancy costs, thus improving productivity and protability and enhancing
shareholder value.
Vendor Due Diligence (VDD)
Focusing on disposals
A VDD allows the seller to retain control over the due diligence
process and minimise business disruptions.
A vendor initiated due diligence is an independently prepared report used as
part of the process of selling a company or one of its divisions and is recognised
internationally as a pre-requisite for major disposals where competitive bids will
maximise value.
This form of nancial due diligence is widely accepted by buyers as an efcient part of
a well managed process.
The terms of reference in the vendor due diligence are based on the potential bidders
likely diligence needs to facilitate a sale.
The VDD report is cleared with the sellers management for factual accuracy but is
independent and all prospective purchasers receive identical information. The report is
signed over to the ultimate purchaser with a full duty of care.
Among the advantages of a VDD are the following:
The seller retains control over the process and disruptions to the existing business
are reduced.
Indicative bids tend to be of better quality with less price negotiation because the
vendor due dilligence process produces advanced notice of potential issues.
The seller goes through the due diligence process only once yet retains a
competitive purchase process.
Access by the due diligence team is under the control of the seller and the reports
independence means full and frank information is provided before exclusivity.
The process encourages private equity bidders.
The information risk discount in bids is reduced, as are requirements to give wide
open-ended warranties and indemnities.
Lengthy contract negotiations are avoided.
A VDD normally goes hand-in-hand with a virtual data room, which provides
controlled access for multiple bidders to the sellers due diligence reporting and
documentation. The data room is supported by management presentations and site
visits where appropriate.
For more information,
please contact:
Karin Hodson
Partner, Corporate Finance -
Due Diligence
Tel: 011 806 5668
Email: khodson@deloitte.co.za
49
Vendor Assistance
Deloitte clients are increasingly calling for a wider range of services to support
the disposal process, particularly in larger transactions. Deloitte has consequently
developed a specialised Vendor Assistance service to provide a comprehensive offering
in this area which can mitigate potential impediments to a sale, reduce risks and
shorten the transaction process. This service can either be a precursor to or be done
instead of a traditional vendor due diligence, depending on the specic circumstances
of the transaction.
Vendor Assistance offers any combination of a number of value-added services, currently
including accounting advisory, carve out, data room support and project management.
The aim of Vendor Assistance is to provide ongoing support to a company that is
considering the sale of all or part of its business. With Deloittes multi-disciplinary
backing, the Vendor Assistance team can provide extensive support to:
Assess whether or not the business or business units are ready for separation and
divestment, following an initial diagnosis.
Identify the major areas where separation is required.
Understand the applicability of existing or past plans for proposed separation.
Work with the seller to establish and execute a carefully coordinated operational
carve out plan.
Provide assistance to prepare stand-alone fnancial information for the carved
out business that is robust and ft for the purpose of a sale - in terms of audited
carve out nancials, vendor due diligence, data room preparation and the
valuation model.
Help to keep lines of communication open by providing resources centrally.
Keep control over the timetable at all stages of the project.
Provide hands-on support through all stages of the sale process, including bidder
meetings, advice on the sale and purchase agreement, and completion accounts.
The Vendor Assistance
team can provide
extensive support to a
company considering
the sale of all or part
of its business.
For more information,
please contact:
Karin Hodson
Partner, Corporate Finance -
Due Diligence
Tel: 011 806 5668
Email: khodson@deloitte.co.za
50
Valuations are fundamental to any M&A or corporate nance
transaction and Deloitte has built a formidable team focused on
this area, serving mostly listed and multi-national clients. The
valuation team has the benet of the best of breed knowledge
from Deloitte globally.
The Deloitte valuations team focuses on business enterprise valuation valuing the
equity of a business, from the buy or sell side, or in some cases in a mediation role.
The team also offers working capital reviews and the examination of prot forecasts.
The real skill is getting to grips with the company, the industry, and understanding the
value drivers which feed into a valuation model, using a methodology tailored to the
specic circumstances of the transaction and derived either on the basis of market
value (analysis of comparative transactions, sales, equity values) or income (based on
5 year discounted projections or appropriate multiples), or turnover in the case of
professional rms.
In the M&A environment sellers may need valuation for a specic subsidiary or may
need to identify where the core value lies in their organisation.
On the buy side, clients need to build valuation models on the target while in
a hostile bid situation, shareholder agreements generally provide for binding
independent valuations.
In any of these cases, Deloitte will workshop the approach and the valuation opinions
on a team basis to ensure consistency.
Fair & Reasonable opinions
The valuation team also specialises in providing independent fair and reasonable
opinions which are required in terms of both JSE (related party transactions and share
issues at a discount) and SRP rules (change of control).
A fair and reasonable opinion is essentially a valuation and Deloitte with its broader
focus on valuation is able to provide these opinions on a highly cost effective basis. A
related and important area is transactions between resident and non-resident parties
which involve a repatriation of funds the South African Reserve Bank generally
requires an independent opinion stating whether the consideration is fair.
Purchase Price Allocation Valuation (PPAV)
Putting Tangible Value On Intangible Assets
The value derived from intangible assets has increased signicantly in todays
knowledge based economy. The book value of many publicly listed companies is
substantially less than the market value. Stock market value is derived, to a large
extent, from assets that do not appear on the balance sheet. This highlights the
increasing signicance of intangible assets and their importance in acquisitions.
For more information,
please contact:
Dave McDuff
Partner, Corporate Finance -
Valuations
Tel: 011 806 5617
Email: dmcduff@deloitte.co.za
Charles Larbi-Odam
Partner, Corporate Finance -
Valuations
Tel: 011 806 5267
Email: clarbiodam@deloitte.co.za
Valuations
A global perspective on an M&A fundamental
51
Developments in International Financial Reporting Standard (IFRS) have considerably
broadened the denition of intangible assets and the identication and valuation of
these assets is now an important requirement for companies engaging in acquisition
activity under IFRS3.
The principle driver behind PPAV is to bring greater transparency to the acquisition
process, to identify and value the assets being acquired, and to arrive at the net
residual amount which will be attributed to goodwill.
Deloitte has a specialist valuations team to assist companies in identifying assets, as
between tangible and intangible, determining the fair value of the intangibles and
making provision for them. This process is offered both post-acquisition in terms of
IFRS, but also importantly pre-acquisition, to assist the buyer in determining what
tangible value they are paying for within the purchase consideration.
Because the market currently sees PPAV as a compliance function, Deloitte emphasises
its importance in the pre-acquisition phase and attaches PPAV to the initial due
diligence, with the objectives of highlighting awareness of the drag effect on the
income statement resulting from the amortisation of intangibles and assisting clients
to analyse the acquisition price which assets are being purchased and what are they
really worth?
IFRS has signicant ongoing implications for acquisitions. The requirement for annual
impairment reviews necessitates the ongoing valuation of intangible assets and, at
each reporting date, an assessment of whether any asset is impaired or whether
intangible assets have lost value.
The Deloitte approach to intangible asset valuation encompasses the following:
Background research a comprehensive overview of the environment in
which the company operates, of its specic operations, its stakeholders and an
assessment relative to comparable transactions.
Intangible asset identication - analysis of the rationale for the acquisition and
the supporting documentation; development of a purchase price consideration
model; assessment of whether recognition and identication criteria have been
met; and alignment with accounting standards.
Selection of valuation methodology as between market, income, cost or
alternative methods.
Valuation of the intangible assets - integration of the fnancial and market
data; estimates of the useful life; application of the selected methodology;
Weighted Average Cost of Capital (WACC) calculation; sensitivity analysis; and
reporting / presentation.
It occurred to me by intuition, and music
was the driving force behind that intuition. My
discovery was the result of musical perception.
Albert Einstein
(When asked about the theory of relativity)
52
Deloitte Sponsor Services is an approved JSE sponsor to listed
companies. Deloitte acts as an intermediary between its
clients, the JSE Limited and the Securities Regulation Panel
(SRP), dealing with a wide array of reporting, compliance and
corporate action issues.
Deloitte project manages the entire process, interfacing between the company and
securities regulators, making it seamless to clients and taking the pressure of corporate
actions away from the operating environment.
With Sponsor Services, positioned within the Deloitte Corporate Finance division, sponsor
clients have access to a wide array of advisory and transaction support services, as required.
Ongoing sponsor support services encompass guidance, advice and processing for
companies regarding:
Application of JSE Listings Requirements
Company announcements, e.g. dividends, cautionarys, and Category 2
transactions
Circulars to shareholders
JSE compliance on fnancial results and corporate fnance announcements
Applications for listings or de-listings
Change of directors, directors dealings and related SENS announcements
Competition issues
Reserve Bank applications
Rights offers
Foreign asset transactions
General communication with the JSE and SRP
Other services include
Compilation and processing of shareholder documentation
Liaison with other professional advisors where appropriate.
Assistance and advice on SRP requirements, reporting accountants
reports, prot forecasts and accounting treatment of transactions
Sponsor Services
Interfacing with the JSE and SRP
For more information,
please contact:
Chris Pretorius
Principal, Corporate Finance -
Sponsor Services
Tel: 011 806 5616
Email: cpretorius@deloitte.co.za
As a JSE sponsor,
Deloitte offers
A competent and
experienced team, recognised
by the regulators
Excellent relations with the
JSE and the SRP
Rapid turnaround times
Experience with a diversity
of clients
Proven project management
skills