The Value in a Red Flag Due Diligence

1. The Value in a Red Flag Due Diligence

2. Content • Introduction • Purpose, Role and Impact of DD • FullFledge DD vs. RedFlagDD • Antitrust Issues • Case Studies • Questions

3. Content • Introduction • Purpose, Role and Impact of DD • FullFledge DD vs. RedFlagDD • Antitrust Issues • Case Studies • Questions

4. Introduction 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

5. Content • Introduction • Purpose, Role and Impact of DD • FullFledge DD vs. RedFlagDD • Antitrust Issues • Case Studies • Questions

6. Purpose, Role and Impact of DD • 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

7. Content • Introduction • Purpose, Role and Impact of DD • FullFledge DD vs. RedFlag DD • Antitrust Issues • Case Studies • Questions

8. Full Fledge DD vs. Red Flag DD (1) • FullFledge DD vs. RedFlag DD • Whatcan/whatcannotbeachievedbya RedFlag DD • Significantregulatoryapprovals • Significantcustomerconsents • Financial statementaccuracyandinternalcontrols(e.g., revenue/expenseconfirmation, etc.) • Significantliabilities (known, unknown, contingent, orother) (e.g., off-balance sheetitems, guarantees, litigation, investigations, etc.) • Significantintegrationconcerns (e.g. labour law issues, integrationissues)

9. Full Fledge DD vs. Red Flag DD (2) • Reasons to goforoneortheother • Time (trade-off against potential risks) • Deal structure (auction) • Public deal vs. private deal • Regulatoryapprovals / thirdpartyconsents • Costs (trade-off against potential risks) • Multiple jurisdictions DD • Scopeof DD (e.g. environmental, IP)

10. Full Fledge DD vs. Red Flag DD (3) • Reasons to goforoneortheother (cont’) • Target (e.g. regulatedenties) • Limited Resources • New businessline vs. ancillarybusinessline • Public deal vs. private deal • Risktolerance • Expectationsofstakeholders (e.g. existing private equityinvestors) • Trend?

11. Content • Introduction • Purpose, Role and Impact of DD • FullFledge DD vs. RedFlag DD • Antitrust Issues • Case Studies • Questions

12. Antitrust Issues Two facets regarding antitrust and diligence: • Antitrust regulation of information sharing governs generally the kinds of information that can be shared during diligence • Need for information to discern antitrust-related regulatory concerns posed by the transaction

13. Antitrust and Information Sharing • Agenciesrecognizethatmergerpartiesreasonablyneedtoexchangeinformationforvaluationandsynergiesanalysis • But, Agenciesareconcernedthatcompetingparties’ activities in themarketplacebecometaintedas a result. • Hencelimitations on informationexchanged in diligence. • Directionofinformationflow: Cash deal –oneway, stock deal – twoway. • Non-publicinformation such aspricingplans, customerlists, nonpublicstrategy, detailedproduct/vendorcosts, employeecomp.canpose real issues • Whenthiskindofinformationnecessary, parties will use 3rdparty (accountingorconsulting firm) or clean teams

14. Antitrust – RegulatoryRisk Assessment • Filingsanalysis: details on turnover, assetinfo, andcorporatestructuretodeterminewherefilingsmightoccur • Substantive analysis: Doesthetransactionfaceregulatoryintervention, andwhatremedies? (Strategydocuments, publicdocuments, regulatoryhistory, politicalsensitivity) • Other risks: Beyondthetransactionrisk, forbuyers, doesthetargetposeriskofcartelenforcement? (Pastenforcement, industrystructure, othersources)

15. Content • Introduction • Purpose, RoleandImpact of DD • FullFledge DD vs. RedFlag DD • Antitrust Issues • Case Studies • Questions

16. Case Study 1 (see separate handout) • Issues: • Can the Company usetheinformationgainedduringthe due diligence to obtain a competitiveadvantageoveritscompetitors? Isittheintentionofthe Company tosimplyobtaininformation in an informationgatheringexerciseordoesithave a genuine desiretoinvestigatethetakeover (acting in goodfaith) andproceed (ifnounacceptablerisksarise)? • Are thereany anti-trust issues? Anydutyof care bythe Company orbythe Target? • Isthisexercise an efficientuseoftheCompany’sownership/resources? • Doesthis extensive due diligencesignificantlyreducetherisksforthe Company? • Can the Company claimthatthe Target did not act in goodfaithandliedaboutitstruepositionbeforethe extensive due diligenceunveiledthetrueposition? Can the Target becompelledtopaythe due diligencecostsofthe Company? • Isa breakagefeepossible? • Woulda red flag due diligence exercise have produced a more commercial solution?

17. Case Study 2 (see separate handout) • 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?

18. Content • Introduction • Purpose, RoleandImpact of DD • FullFledge DD vs. RedFlag DD • Antitrust Issues • Case Studies • Questions