Due Diligence - National Contract Management Association

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Mergers & Acquisitions for
Contracts Professionals: How
we fit into the puzzle
Breakout Session #910
Jill Mitchell, Contracts Operations Manager, Raytheon Company
Steffen Jacobsen, Contracts Manager, Raytheon Company
Date
Time
16 April 2008
1:30 pm – 2:30 pm
2
… How We Fit into the Puzzle
Acquirer
PMO
BD
Ex/
Im
CONTRACTS
legal
finance
HR
engineering
treasury
HR
legal
SCM
executives
insurance
finance
Acquiree
3
Disclaimer and Non-attribution
• Disclaimer
– The views in this presentation are those of
Jill and Steffen only and are not to be
construed as the views of the Raytheon
Company
• Non-attribution
– Do not attribute the discussions today to
the speaker or those in the audience
4
Scenario for this Presentation
• Industry Contracts Manager’s Viewpoint
• Federal and DoD Contracting
• Practical “How-To” Guidance
• Checklists / Tools
5
Learning Objectives
Background
The Challenge: How do I…?
1. Identify an opportunity for M&A
2. Contribute to a successful due diligence
3. Ensure successful transition and integration
6
Background: Mergers or Acquisitions
Merger
• A transaction that results in a wholly new organization formed due to
the merging of two or more organizations
Acquisition
• A transaction in which one firm is taken over by another firm.
Alternatives not covered in this
presentation but always worth
considering:
•Asset acquisitions
•Technology acquisition / technology
licensing with partial or total exclusivity
7
Mergers and Acquisitions Today
Dubai Aerospace Buys Standard Aero,
Landmark for $1.9B
Raytheon Acquires Oakley Networks
8
Mergers and Acquisitions Today
“Defense spending remains at historic highs, and the commercial
aerospace marketplace is at full stride. Industry players are flush
with cash, and private equity money is pouring into the
marketplace. In 2007 we could see the 1999 record finally
eclipsed. Deals worth $25 billion have already been announced or
completed—by far the fastest start we've seen this decade.” *
* Stuart McCutchan quoted on www.defenseindustrydaily.com article Defense & Aerospace M&A Hit
370 Deals & $40B in 2006 at http://www.prnewswire.com/cgibin/stories.pl?ACCT=104&STORY=/www/story/04-17-2007/0004567449&EDATE=
(emphasis added)
9
Mergers and Acquisitions Today
• Defense and aerospace companies completed 370 transactions of
M&A deals worth more than $40 billion in 2006*
• Firms are poised and eager to divert cash to M&A opportunities
that allow them to:
 Meet ambitious investor expectations for year-to-year growth
 Build and strengthen existing product lines
 Diversify their portfolio to compete more effectively in a marketplace that can only
cool off
www.defenseindustrydaily.com article Defense & Aerospace M&A Hit 370 Deals
& $40B in 2006 referencing InfoBase/DACIS' “Defense Mergers &
Acquisitions ” report
10
The Government Customer’s Perspective
Two options for excess cash:
 Wall Street: pay cash out through larger dividends and stock
repurchases
 Pentagon: spend more on basic military research and further
acquisitions that would streamline the industry even more*
 potentially reducing costs and eliminating excess capacity
* Wayne, Leslie “Arms Makers Find Being Cash-Heavy Is Mixed Blessing” New York Times May 12, 2005:
http://www.nytimes.com/2005/05/12/business/12cash.html?pagewanted=1&n=Top/Reference/Times%20Topics
/Organizations/D/Defense%20Department&_r=1
11
The Government Customer’s Perspective
Concerns:
 National security concerns associated with M&As by foreign firms
 Competition
 Vertical integration risks: acquiring contractors will –
 prefer newly acquired suppliers over external suppliers even if the external
suppliers are superior
 increase barriers to market entry for their competitors
 compromise proprietary information obtained on competitors through
acquisition of their competitors’ supplier(s)
 refuse to use suppliers owned by their competition
 reduce competition at the subcontractor level
 Horizontal integration
 Reduced private R&D investment to develop new and innovative
technologies
12
The Government Customer’s Perspective
Concerns:
 Spares availability
 Weapon system support
 Interruption to on-going activities
 Erosion of smaller, cheaper, more agile companies and
competitors
13
Candidate
In-Process
Contracts
Professionals
Play a Crucial
Role in the
M&A Process:
Candidate
Unsolicited
Initial OM/Info Review
Indicative Offer
Due Diligence
Negotiations
Closing
Integration
14
Opportunity
Identification
15
Identifying an Opportunity
 Reasons to M&A (i.e., what to look for)
 Good press
 Public Profile
 Reputation
 Access to new customers
 Complementary technologies
 Adjacent growth markets
 Advanced processing technologies
 Benefit from lower rate structures
 Expand product offerings
 Focus on areas where the acquirer can integrate into the acquiree’s product capability
and vice versa
 Acquire past performance and backlog of acquired companies
to help you go after prime contracts
16
Identifying an Opportunity
Government “Hot Topics” are
for acquisition focus:
 Military readiness and logistics
 Intelligence operations and analysis
 Network-centric solutions
 Information interoperability
 Base realignment
 Military health care modernization
 Cybersecurity
From Richard Knop’s article To Stay on Top, Make Sound Investments in Washington
Technology; 06/11/07 issue; Vol. 22 No. 10
17
Business Size Considerations
Large Business vs. Small Business M&As
Large businesses:
– Size allows acquirers to get more of what they are looking for in
terms of revenue, contractors or employees
– Usually have less customer concentration and more administrative
support than small businesses
but…
18
Business Size Considerations
Small business:
– May be more nimble and, until recently*, had some advantages in
obtaining certain government contracts
“The Small Business Administration’s new size recertification rule could radically
change the landscape for small businesses interested in being acquired and their
potential buyers. Any small business will need to recertify its small-business status
after being acquired, and if it is no longer small, its contracts will no longer count
against the congressionally mandated targets for small-business contracts…
Although the new rule’s effects won’t be apparent for some time, many observers
fear that it could lead to agencies terminating contracts. The value of those contracts
would therefore be diminished when potential acquirers assess the acquisition
target.”
From Matt Swartz’s article Small Businesses on the Block Should Explore ESOPs in
Washington Technology; 06/11/07 issue; Vol. 22 No. 10
Contract portfolios may not be as valuable as they once were
19
Brainstorming
Wall Street Journal
 Industry magazines
 Industry associations
 Get input from others

–
–
–
–
Other employees
Friends
Family
Customers


Don’t ask who they think we should acquire, rather 
Ask what we are aren’t doing well; follow-up by asking who does it well
Think outside the box - growth will come from
adjacent market opportunities
20
Factors to Consider
Alignment with Strategy




Greater corporate strategy
Strategy and future state
• Mission Support
• International
• Competitive Pursuits
Individual P&L strategies
Adjacent markets or whitespace
Solid Operating History



Business operating history 3+ years
Strong leadership
Desirable customer relationships,
technology, contract, etc.
Financial Hurdles




Robust revenue growth outlook
Operating margin is not dilutive
Positive cash flow
High ROIC business
21
Summary of Prioritized Gaps
Gap
Business
Area
Rationale
1
2
3
4
5
6
7
8
9
?
Legend:
Gap Closure
by M&A Most Likely Solution
Gap Closure by Partnering / Internal
Actions Most Likely
Gap Closure method in development could
be by M&A
22
Summarize
Once you’ve identified the
opportunity, collect as much
data on its financials, strategy,
and synergies and summarize
it for management…
23
Key Candidate Target Summary
Overview:
Summary Financials: (FYE = 6/30)
 Public company established in 1977
 Provide solution for lifecycle support with program, financial,
test and logistical services and training Information
$80
$70
$60
$50
$40
$30
$20
$10
$0
17%
12%
7%
2%
-3%
-8%
2004A
Strategic Rationale:
 Expand customer relationships: ABC, NOP, XYZ
 Access to new programs: Seagull, Bluebird, Goldfinch
 Adds a leap forward in imaging
2005A
2006P
2007P
Synergy Opportunities:
 Audubon Networking Capabilities; visual realization; mapping
and modeling
 Interoperable tracking software
 Adds credentials in ID/IQ arena
 Sensors, digital video broadcast and
surveillance technologies
 Supports our recent win on Sparrow with network solutions and
decision support systems
 Complex decision-making algorithms
 Supports our effort in Condition Based Maintenance
EBITDA %
 Provide information connectivity solutions that capture,
analyze and present real-time information
Revenue ($m)
 Headquarters in San Francisco, 123 people
 Total Asset Visibility
 Logistics Situational Awareness
24
Why Do M&As Fail?
In a study by Watson Wyatt:
• 66% of companies failed to meet their profit goals following
a merger
• 54% did not meet their cost cutting goals
In a study by A.T. Kearney:
• 58% of mergers failed to achieve their stated goals
• 58% of global mergers managed to outperform competitors
after two years
*From Why Do Mergers Fail? What Can Be Done to Improve Their Chances of
Success in Key Strategy, January 2006.
25
Why Do M&As Fail?
 Lack of Communication
 Lack of Direct Involvement by Human Resources
 Lack of Training
 Loss of Key People
 Loss of Customers
 Cultural Differences
 Power Politics
 Inadequate Planning
26
Why Do M&As Succeed?






Extensive and Regular Communication
 Following announcement of the M&A, maintain open lines of communication with middle
management and lower level employees on the going-forward plans
 Be clear and consistent, even if the message isn’t always positive
Effective Planning at All Stages
 Realistic goals and timeframes
 Only 1 out of 5 companies that have acquired another has developed a clear and satisfactory
implementation plan
Retain Key People
 25% of top performers leave their company within 3 months of a major organizational event
 47% of senior managers leave within the 1st year
Manage Cultural Differences
Training and Development
 Train everyone
• Managers overseeing the M&A process
• Employees of the M&A company
Post M&A Integration Teams
27
Due Diligence
28
Due Diligence
•
Contracts role is fact finding only
– Review the contractual documentation and provide input on risks and issues
– No negotiating; no decision making
•
Trust is critical
– The team must be composed of members that are mature and trustworthy enough to
remain silent on the entire fact of M&A discussions (this protects against turnover
and maintains moral)
•
Expect ¾ to full time support for 30 to 45 days
•
Recognize the due diligence team’s effort, regardless of whether the
the acquisition is made
29
Q&A Format
 Questions and answers are processed through the intermediary (e.g. bank)

Demand same day responses
date
CONTRACT QUESTIONS AND ANSWERS
Contract Question Date of
Question
Number
Contracts_001
Question
PROJECT NAME:
Sector
Answer
Date of
Answer
1/23/2008 Does Sector have any open
requests for equitable adjustment
(REA) invoices, or is Sector
involved in any customer claim
actions that may affect the ability
to collect on an open accounts
receivable
Contracts_002
PROPRIETARY INFORMATION
30
Due Diligence
The seller (or intermediary) should establish a virtual collaboration
environment / data warehouse
 Populate it with all contractual documentation
 Contracts and modifications
 Non-disclosure agreements
 Current proposal efforts
 Allows for “virtual” due diligence from the comfort of your own office
 Availability of documentation is critical!
 Each folder in the collaboration environment should contain a 1-2 page synopsis
describing the documents that are housed in that folder
 e.g.: contract, period of performance, value, type, deliverables, and status
 The collaboration environment should be constantly updated with all new
modifications, RFPs, etc
31
Due Diligence
 Work in close cooperation with the company you’re acquiring – an
adversarial posture will always backfire
 The due diligence process may seem excessively intrusive, but it builds
relationships and provides the opportunity for the acquiree to better
understand his own company while at the same time pleasing the
acquiring company
 Hesitancy or hostility during due diligence is often a sign that a deal’s
value will be more difficult to realize than originally expected
Be Patient – Don’t be Disappointed if the
Decision is Made to “No Go”
32
Due Diligence – Document Review Checklist
Evaluate every current contractual document the acquiree has as if you
were reviewing one of your own contracts for risks and opportunities:
 Contracts
 Non-standard terms and conditions (i.e. H-clauses, special T’s and C’s, etc)
 Non-Disclosure Agreements
 Who are they with?
 What is their duration?
 What proprietary data is outstanding that would be important to request
returned or destroyed?
 Teaming Agreements
 Look for exclusivity or conflicts of interest with your own company’s pursuits
and teammates
 List teaming agreement and exclusivity
33
Due Diligence – Document Review Checklist
 Small Business Innovation Research (SBIR) contracts
 Current and upcoming RFPs that the company is responding to
 Requests for Equitable Adjustment
 Agreements granting or obtaining rights to intellectual property or the use
of intellectual property
 Offset agreements: what are the company’s obligations
 Government Terminations
 Debarment
 Waiver of claims agreements
34
Due Diligence – Document Review Checklist
 Ratings
 Contractor Performance Assessment Report (CPARs)
 Evaluations and complaints by customers during the past 5 years
 Consider approaching customers directly to understand how well the company
manages them
 Award fee ratings
 Organizational Conflicts of Interest (OCI)
 Mitigation plans currently in effect and for the past 3 years
 Correspondence relating to OCI matters
 IDIQs, GSA schedules, and any other task-order contract vehicle-based
business
 Identify roles, prime and sub, and experience
 The extent of the company’s utilization of the IDIQs
 Assess the rates used on the IDIQs
35
Due Diligence – Contract Review Checklist
Review contracts, modifications and RFPs for key terms and obligations:
 Insurance requirements
 Does the acquiring company maintain sufficient umbrella insurance or will
additional insurance coverage be required?
 Liquidated Damages
 The company’s liabilities and probabilities of incurring those liabilities
•
Consider schedule and on-going performance
 Limitation of Liability
 Quantifies the company’s exposures
 List dollar-limits of liability w/ time-frame limits
36
Due Diligence – Contract Review Checklist
 Assignment and novation clauses and restrictions
 Indemnification
 Intellectual Property terms






Have restricted/limited rights been asserted?
Licensing agreements negotiated?
Commercial vs. non-commercial-but-restricted-use technologies?
Was IP developed at company expense or using government funds?
List all rights asserted by contract
List 3rd party software license requirements, such as reporting, royalties, and
payment obligations
 Small business re-certification requirements
37
Due Diligence – Contract Review Checklist
 Deployment terms and liabilities when deploying for military operations
 Does the company have any deployed personnel? If so, what are the contract’s
Defense Base Act (DBA) requirements? Is DBA coverage provided for war zone
deployment?
 Organizational Conflicts of Interest (OCI)
 For each contract that contains an OCI clause, process an OCI sweep through your
company to confirm there’s no conflict
 Where programs are similar or related to your company’s programs, ensure there’s no conflict
38
Due Diligence – Contract Review Checklist
 Warranty exposure: List all outstanding warranties and quantify liabilities
associated with them
 Be on the lookout for:
• Warranty claims, lawsuits, recalls, or post-manufacturing remedial measures
from the preceding 5 years for any products or services
• Written materials or documents that may create implied warranties
• Oral warranties
• Defects or other potential problems with products or services that could give
rise to a warranty claim
• Is warranty expense “pay as you go” or reserved in the P&L and balance
sheet?
39
Due Diligence – Tracking Checklist
Record and catalog all agreements and identify any terms
and conditions that may raise a red flag
 Look for:
 Items (risks, liabilities) that may affect the purchase price of the
company
 Items that may change once the company is purchased.
This cataloging and categorizing is critical!
40
Tracking
E-room Folder
Contract #
Description
Customer
7.B.1 a to e DAAB07-08-D-B001 Support Services Contract under US Army: CECOM
the ABCD Program . Provide
engineering support,
modeling/simulation support,
and support necessary to
implement new tactics.
Label As:
Value
$5,000,000
Options
Options Values Contract Type
Unique Ts & Cs
2 options,
$10,000,000 CPFF with FFP There is a clause (H14) entitled
unexercised
components "Software Development" that
requires the delivery of
"executable code to the
government with the release of
each patch/version of software."
"PROPRIETARY INFORMATION"
Use Template for Tracking Organization
41
Due Diligence – Reporting Checklist
Submit a weekly report to the due diligence lead summarizing
progress and flagging issues and recurring themes
 Summary of Diligence Scope (# of contracts in review/already reviewed by contract-type
by sales)
 Key findings (% of contracts as prime; % of contracts as subcontractor; next-year
contract projections/back-log; list of customers; etc.)
 Outstanding Issues / concerns (intellectual property, export, OCI, Safety Act issues)
 Mitigation Plans
 Financial Impact
 Integration Concerns
 Outstanding Data Items
 Recommendations
42
Due Diligence – Out-brief Checklist
Prepare a final out-brief for the decision makers containing:
 Due diligence results from all functional reviews
 A schedule of accomplishments and items remaining to be
accomplished
 The major due diligence tasks concluded by the Contracts function
 The top due diligence issues
 A color-coded status with key comments from the weekly reports
43
Transition
and
Integration
44
Transition and Integration
• Smoothness of integration largely depends on:
 How friendly/hostile the merger/acquisition process has been thus
far
 Whether the employees played a role in the decision making
 Whether the company is employee-owned such that they stand to
benefit financially from the deal
• Utilize the due diligence team, though at a much reduced
frequency, to take advantage of existing relationships
45
Transition and Integration
Do not guarantee “no change”
 Stress that there will always be
change - but good change
 Recommended reading: Who
Moved My Cheese by Spencer
Johnson, about adjusting and
embracing changes and
transitions at work with an open
mind and motivated spirit
• Quick read
• Buy it for all employees
46
Transition and Integration
 Form a Mentor-Mentee relationship with the contracts manager(s) of
the acquired organization
 Host face-to-face staff meetings with the acquired company contracts
managers to socialize with the rest of the team
 Be available and responsive to phone calls and questions from the
acquired company
 It makes a great impression and leaves them excited about
joining your team
47
Transition and Integration
 Be a salesman: sell them on working for/with you and the
company
 Be flexible: let the integration process happen gradually in
certain areas

Communicate which policies and procedures are critical

Particular terms and conditions
Proceeding on contracts at risk
Teaming agreements
OCIs
Signing Authority
Gating

… and which policies and procedures are less critical







Filing requirements
Specific NDA language
48
Integration Checklist
Share:










How and where to search for company data online
Listings and copies of applicable policies and procedures
Certifications and Representations
Copies and examples of weekly and monthly reports
A list of policies and procedures that must be followed immediately
Scenarios that require higher-level approval
Metrics
Company, Business Unit, and Contracts specific organizational charts
A list of common acronyms
Descriptions of key program, pursuits, and initiatives the acquiring
company is involved in
49
Integration Checklist
 An appropriate level of delegated signature authority
 “Empowered official” status for purposes of export/import and the
Directorate of Defense Trade Controls (DDTC)
 Administrative support – where the acquirer has centralized administrative
services
 Details on IDIQs (GSA schedules, GWACs, etc) – opportunity for two-way
synergies
 Terms and conditions guidelines for contracts
 Copies of standard teaming agreement and NDA formats
 Pertinent leadership and training development programs
 Past performance data
50
Integration Checklist
Assignment Clauses:
 Will typically only require notification to the customer or prime
contractor.
 Novation is not required as long as the same company is
performing the work, with the majority of its assets unchanged.
51
Concluding Comments
Identify the opportunity +
due diligence +
successful transition and integration =
Contracts
Business
Acumen
Acquirer
PMO
BD
Ex/
Im
CONTRACTS
legal
finance
HR
engineering
treasury
HR
legal
SCM
Synergies
Sales
Solutions
Success
executives
insurance
finance
Acquiree
52
Contact Information
• Jill Mitchell
– 972.344.4145
– [email protected]
• Steffen Jacobsen
– 703.204.6515
– [email protected]
53
Questions and Answers
•
•
•
•
•
•
You have comments – please share
You have questions – we have answers
Audience help in answering is welcome
Share the time with others
Must conclude formal part on time
Be glad to discuss afterwards outside room
54
It’s Been an Honor!
Thank You!
55
BONUS: EXPORT / IMPORT
CHECKLISTS
56
Due Diligence – Export/Import Checklist
Identify:
 Any commodities, technical data, software or services the company has
exported within the last 5 years
 Next to each item exported, identify the pertinent licenses and/or agreements
in place for that export
 (TAAs; State/Commerce export licenses) and the U.S. government agency
which issued the license
 Products subject to Commerce Department jurisdiction
 Business activities involving items on the U.S. Munitions List in any of the
countries proscribed by section 126.1 of the ITAR
 Import tariff classifications for all imported products
 Contact information for freight forwarders used within the past 5 years that
facilitated these exports
 Empowered Officials
57
Due Diligence – Export/Import Checklist
 Any outstanding or ongoing export licensing, export jurisdiction or other export
control issues
 Non-routine issues that are the subject of correspondence with one or more
government agencies
 ITAR violations
 Any person in the company who has been or is the subject of an indictment
 Any person in the company who has been convicted of violations of any of the
U.S. Criminal Statutes enumerated in section 120.27 of the ITAR, the EAR,
Customs regulations, EU trade controls and customs requirements, or any
foreign country trade control and customs regulations
 Any person in the company who is ineligible to contract with, or to receive a
license or other approval to import articles or defense services from or to
receive an export license or other approval from any agency of the US
Government, the E.U. or foreign government
58
Due Diligence – Export/Import Checklist
 Does the company conduct business or have any know business activities or
representation in any of the following countries:
 Algeria, Bahrain, Comoros, Cuba, Djibouti, Iran, Iraq, Kuwait, Lebanon, Libya,
Mauritania, Morocco, North Korea, Oman, Palestine, Qatar, Saudi Arabia, Somalia,
Sudan, Syria, Tunisia, UAE or Yemen
 Boycott requests received over the last 5 years or certification that no requests
have been received
 Include copies of reports to US Government
 All foreign national employees
 Any foreign ownership and/or control
 Commercial products specifically configured, adapted, modified, designed, or
developed for a military application
59
Export/Import Identification
Description of Exported /
Import Tariff Issuing State Commerce ITAR 126.1 US Freight
Contract #
Imported Item
Part Number Export License/Agreement Classification Agency Jurisdiction Jurisdiction Munitions List Forwarder Used
DAAB07-08-D-B001 Software Description Document NA
DSP-83
NA DoS X
no
none
Use Template for Export/Import Identification
60
Integration Checklist – Export/Import
Provide copies of all policies and procedures related to Export/Import Compliance including
anything related to:











Classification Process for Hardware and Technical Data
Record keeping
Process to handle any Non-U.S. National Employees/ Visitors/Residents/ Dual Nationals
Shipping/Receiving
BATF Requirements
Classified Export Process
Re-exports/Retransfer Procedures
Security Forms – non-U.S. National Visitors
Screening for “Denied” Parties Anti-boycott Requirements
Part 130 Process
Anti-boycott screening and reporting procedures: identify procedure for
screening and reporting of boycott requests
 Recordkeeping Requirements: provide instructions/details on location of export documents such
as Shippers Export Declarations (SED), invoices, airway bills, bills of lading
61

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