The due diligence process from the underwriter's - Fried Frank

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• Bankers should perform a sensitivity analysis to determine the key drivers and risk factors for the business. • Bankers should review the company’s capital expenditure plans (for maintenance and for growth) and need to consider when large cash outlays by the company are required. • Bankers should compare the company’s key financial statistics with the statistics of competitors. • Review of projections will frequently result in modifications or enhancements to the description of the company’s business strategy and MD&A in the prospectus. • Bankers and lawyers should verify whether the company’s credit facilities need to be amended in order to allow the company to achieve its business plan. For example, the capital expenditures covenant may limit the company’s expansion plans. • Bankers can calculate whether the debt or equity offering will cause the company to violate financial covenants in the company’s financing documents. • Bankers should focus on off-balance sheet or under-recorded liabilities and contingencies, including in particular potential employee benefit plan liabilities (unfunded pension plans) and worker’s compensation liabilities. • Review of financial statement footnotes will describe potential contingencies. • Bankers should also focus on large items on the income statement which affect the quality of the company’s earnings, such as • unusual or nonrecurring items, • related party transactions, • acquisitions and divestitures, • potential compensation charges as a result of cheap stock issues and • reversal of accrued liabilities. • When dealing with non-U.S. issuers, bankers should also focus on differences between U.S. and non-U.S. GAAP. Significant differences may involve: 12 100
• revenue recognition • goodwill • pension accounting • accounting for stock options d. MD&A Due Diligence • MD&A is an increasingly important focus of company disclosure. SEC rules require disclosures about off-balance sheet liabilities and contractual obligations in the MD&A, and other SEC guidance calls for disclosure in MD&A of liquidity and capital resources and related party transactions. • Segment, divisional, operating unit and product line data should be carefully reviewed to determine trends that may not be disclosed in the draft MD&A. • Underwriters should due diligence the company’s financial performance since the most recent period included in the MD&A. Underwriters should obtain as much information in as much detail as possible for the most recent period. Companies are often reluctant to do more than say that their numbers seem generally on target. • Even though the latest month or interim period would not be described in the MD&A, any trend which appears in the financial performance for this most recent period should be described in the overview section of the MD&A if material. The new period may show that an uncertain blip in the most recent quarter is actually becoming a trend. • It is important to review cost items as a percentage of sales rather than on a total basis in order to determine the trends in costs. • Discussions should be held with the appropriate personnel regarding future, anticipated or possible cost increases, such as labor costs due to a tight labor market or supply costs due to a new supply contract. • Underwriters should focus on changes in margins. • For example, comparing profit margins (operating income divided by net sales) of the company over the years can show the company’s growth in profitability or decline. It is also 13 101
Page 1: 3 THE DUE DILIGENCE PROCESS FROM TH
Page 5 and 6: 1. WHY DO UNDERWRITERS CONDUCT DUE
Page 7 and 8: or other written or oral statement
Page 9 and 10: numbers which become available for
Page 11: • interviews with senior manageme
Page 15 and 16: • Correspondence with the SEC or
Page 17 and 18: • In U.K. public equity offerings
Page 19 and 20: j. Audit Committee Due Diligence
Page 21 and 22: • During the due diligence proces
Page 23 and 24: • Even though the financial state
Page 25 and 26: • “It argues in particular with

The due diligence process from the underwriter's - Fried Frank

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