The Value in a Red Flag Due Diligence

7 June 2014 –Introduction –Purpose, Role and Impact of DD –Full Fledge DD vs. Red Flag DD –Antitrust Issues –Case Studies –Questions Content 2

The Value in a Red Flag Due Diligence7 June 2014 –Introduction –Purpose, Role and Impact of DD –Full Fledge DD vs. Red Flag DD –Antitrust Issues –Case Studies –Questions Content 3

The Value in a Red Flag Due Diligence7 June 2014 Panelists –Michael Belsley, Kirkland & Ellis, Chicago –Damian Didden, Wachtell, New York –David G. Gibson, AmerisourceBergen Corporation, Chesterbrook –George Magera, Federated Investors, Inc., Pittsburgh –Shaun Rixon, Gategroup, Zurich Moderator –Urs P. Gnos, Walder Wyss, Zurich Introduction 4

The Value in a Red Flag Due Diligence7 June 2014 –Introduction –Purpose, Role and Impact of DD –Full Fledge DD vs. Red Flag DD –Antitrust Issues –Case Studies –Questions Content 5

The Value in a Red Flag Due Diligence7 June 2014 –Understanding the business of the target –Identification of synergies, potentials, strengths and weaknesses –Identification of risks related to the target –Determination viability of the transaction –Determination of the ideal deal structure –Determination of reps & warranties, covenants and indemnities –Identification of third party consents and governmental approvals (e.g. competition clearance) –Evaluation of a fair price –Integration Purpose, Role and Impact of DD 6

The Value in a Red Flag Due Diligence7 June 2014 –Introduction –Purpose, Role and Impact of DD –Full Fledge DD vs. Red Flag DD –Antitrust Issues –Case Studies –Questions Content 7

The Value in a Red Flag Due Diligence7 June 2014 –Full Fledge DD vs. Red Flag DD –What can/what cannot be achieved by a Red Flag DD –Significant regulatory approvals –Significant customer consents –Financial statement accuracy and internal controls (e.g., revenue/expense confirmation, etc.) –Significant liabilities (known, unknown, contingent, or other) (e.g., off-balance sheet items, guarantees, litigation, investigations, etc.) –Significant integration concerns (e.g. labour law issues, integration issues) Full Fledge DD vs. Red Flag DD (1) 8

The Value in a Red Flag Due Diligence7 June 2014 –Reasons to go for one or the other –Time (trade-off against potential risks) –Deal structure (auction) –Public deal vs. private deal –Regulatory approvals / third party consents –Costs (trade-off against potential risks) –Multiple jurisdictions DD –Scope of DD (e.g. environmental, IP) Full Fledge DD vs. Red Flag DD (2) 9

The Value in a Red Flag Due Diligence7 June 2014 –Reasons to go for one or the other (cont’) –Target (e.g. regulated enties) –Limited Resources –New business line vs. ancillary business line –Public deal vs. private deal –Risk tolerance –Expectations of stakeholders (e.g. existing private equity investors) –Trend? Full Fledge DD vs. Red Flag DD (3) 10

The Value in a Red Flag Due Diligence7 June 2014 –Introduction –Purpose, Role and Impact of DD –Full Fledge DD vs. Red Flag DD –Antitrust Issues –Case Studies –Questions Content 11

The Value in a Red Flag Due Diligence7 June 2014 Two facets regarding antitrust and diligence: 1.Antitrust regulation of information sharing governs generally the kinds of information that can be shared during diligence 2.Need for information to discern antitrust-related regulatory concerns posed by the transaction Antitrust Issues 12

The Value in a Red Flag Due Diligence7 June 2014 –Agencies recognize that merger parties reasonably need to exchange information for valuation and synergies analysis –But, Agencies are concerned that competing parties’ activities in the marketplace become tainted as a result. –Hence limitations on information exchanged in diligence. –Direction of information flow: Cash deal –one way, stock deal – two way. –Non-public information such as pricing plans, customer lists, nonpublic strategy, detailed product/vendor costs, employee comp. can pose real issues –When this kind of information necessary, parties will use 3 rd party (accounting or consulting firm) or clean teams Antitrust and Information Sharing 13

The Value in a Red Flag Due Diligence7 June 2014 –Filings analysis: details on turnover, asset info, and corporate structure to determine where filings might occur –Substantive analysis: Does the transaction face regulatory intervention, and what remedies? (Strategy documents, public documents, regulatory history, political sensitivity) –Other risks: Beyond the transaction risk, for buyers, does the target pose risk of cartel enforcement? (Past enforcement, industry structure, other sources) Antitrust – Regulatory Risk Assessment 14

The Value in a Red Flag Due Diligence7 June 2014 –Introduction –Purpose, Role and Impact of DD –Full Fledge DD vs. Red Flag DD –Antitrust Issues –Case Studies –Questions Content 15

The Value in a Red Flag Due Diligence7 June 2014 –Issues: –Can the Company use the information gained during the due diligence to obtain a competitive advantage over its competitors? Is it the intention of the Company to simply obtain information in an information gathering exercise or does it have a genuine desire to investigate the takeover (acting in good faith) and proceed (if no unacceptable risks arise)? –Are there any anti-trust issues? Any duty of care by the Company or by the Target? –Is this exercise an efficient use of the Company’s ownership/resources? –Does this extensive due diligence significantly reduce the risks for the Company? –Can the Company claim that the Target did not act in good faith and lied about its true position before the extensive due diligence unveiled the true position? Can the Target be compelled to pay the due diligence costs of the Company? –Is a breakage fee possible? –Would a red flag due diligence exercise have produced a more commercial solution? Case Study 1 (see separate handout) 16

The Value in a Red Flag Due Diligence7 June 2014 –Issues: –What facts might direct the Company to conduct a red flag diligence? –What facts might direct the Company away from a red flag diligence toward a tradition in- depth diligence review? –What other facts would be helpful to know before making a decision? –How might a limited red flag diligence be helpful? In what subject matter areas might a full diligence be warranted? –How would a red flag diligence operate in practice under this fact scenario? –What important information about the Target can neither a red flag diligence nor a full fledge diligence determine? Case Study 2 (see separate handout) 17

The Value in a Red Flag Due Diligence7 June 2014 –Introduction –Purpose, Role and Impact of DD –Full Fledge DD vs. Red Flag DD –Antitrust Issues –Case Studies –Questions Content 18

Thank you for your attention