A thorough, smart and stealthy due diligence process is among the top ingredients for successful mergers and acquisitions. We spoke to finance executives and dealmakers about the homework a growth-hungry company needs to do. “You don’t always want to let the staff of the other company or companies know you are doing this process,” says Sibanye Gold CFO Charl Keyter. “You have to be stealthy so as not to raise suspicions.” Charl gives one of the best and certainly most amusing explanations of due diligence:
"It is like the other company is lifting its skirts. They let you look into their books, their operations and their processes."
By Toni Muir
- Read what Standard Bank's Dr Andrew Balnaves had to say on the subject.
The due diligence process, while "more painful" than what is involved with a public offering to acquire another company, gives greater access to information and in greater detail, says Charl.
"You can interrogate life of mine, for example. You can understand the real performance or under performance of areas and you can do physical site inspections. So, if we acquire a mine we can go on underground visits and see what the infrastructure is like."
If any South African CFO can provide some exciting insight into due diligence, it must be Charl, whose company is one of the most acquisitive ones around at the moment. Sibanye Gold was spun out of Gold Fields in early 2013, and over the past four years has enjoyed a rapid rise to success. It is widely regarded as one of South Africa's most dynamic mining companies.
After acquiring the Cooke asset and Wits Gold, Sibanye ventured into platinum in 2015. The put in an offer to acquire Anglo American Platinum's Rustenburg assets, also making an offer to Aquarius Platinum shareholders, which was accepted. The Aquarius transaction concluded in April 2016. The next step for the company is abroad, with Sibanye being currently involved in a R30 billion acquisition of Stillwater Mining in the United States (platinum and palladium), a deal that is already approved by the South African Reserve Bank and expected to be concluded during the second quarter of this year.
Finance's role
Charl has excellent insight into the role finance heads should play. "I don't believe the CFO should drive this process but ultimately, when you do an acquisition, it must be funded either by internal sources or external. The role of the CFO is to ensure the due diligence is performed accurately and meticulously because ultimately, the guys who do the deal don't sit with the deal afterwards, their work is done. The CFO must ensure prudence is applied in the process. You have to be on top of this because otherwise how can you say, with knowledge, whether the deal should go through or not?"
One of the most important takeaways of the due diligence process, Charl says, is having a level of accuracy that can support the financing the company needs. He has also learnt some tough lessons along the way, particularly with regards to tax.
"Experience has dictated that we had to do a lot of work post the acquisition as far as tax was concerned. I would definitely do a lot more work around the tax due diligence in future, getting legal opinions in this regard, and I would do this upfront."
Agreeing upfront on what sort of due diligence information is required also goes a long way to ensuring a successful due diligence process, says Charl. Having two willing parties helps too, as does adhering to timelines.
Be stealthy
While there are numerous challenges to the process, Charl says keeping the investigation subtle can have a knock-on effect. "You don't always want to let the staff of the other company or companies know you are doing this process. You have to be stealthy so as not to raise suspicions." A downside to this, he says, is that the information you need may not always be forthcoming.
"It can be a bit like pulling hen's teeth. With it being secretive, you can't play open cards or have frank discussions with staff. Sometimes the other party even limits you in terms of what line of questioning you can offer. You don't always have unrestricted access."
Another challenge, says Charl, is seeing through the make-up. "When something is put up for sale, it is dressed up. The challenge is to see through that to the actual results, performance and value of the assets to then make adjustments to internal models to ultimately come up with a company value." He offers some words of caution: "In several instances we have questioned, when we are presented with a life of mine profile, why the business is being put up for sale if it is such a good story. Guys put their best foot forward and use their best-case scenarios. You must be careful of that and be sure to look through historical information and make your own assumptions. Don't rely only on the assumptions of the counterparty."
Depleting assets
When it comes to seeking advice and expertise, Charl says there is certainly scope for outside opinion. "Experts supplement any shortfalls you may have. As a company, you can't have all of the capacity in-house. If we are entering into a new commodity that we believe has value for the company, we bring in somebody with experience in that," he says. Lawyers are relied upon to draft the terms of the due diligence as far as confidentiality goes, and to undertake the legal due diligence, he says. Accounting firms are brought in to help with tax issues, while advisors are used at the deal structuring phase and to assist with modelling. "We also make up an internal team from our existing operations, people who have experience interrogating numbers. It is a multi-disciplinary task team that includes HR, accounting and a mineral resources expert - it is what we call the owners team."
Asked whether there are nuances regarding deal making in the mining industry compared to other sectors, Charl says things are the same for the most part, bar some considerations.
"In the mining industry, because you are working with depleting assets, you have to be fairly sure of the resources and reserves that you are acquiring. The actual mineral that you mine is the fundamental building block of a mining company. That is where the difference is. A manufacturing company can keep on producing, whereas, if we get it wrong as far as reserves and resources are concerned, we can't manufacture that. It is the hand we have been dealt."
Charl's due diligence top 5
- Understand the asset that you are buying: what are the reserves and resources?
- Conduct adequate legal due diligence.
- Conduct thorough financial due diligence and understand the company's operations fundamentals. Don't neglect the tax aspect and how this is structured.
- Pay attention to the human capital process and the people involved and ensure that you can accommodate the Ts and Cs of their employment contracts into yours.
- If relevant, conduct environmental due diligence.
This article first appeared in CFO Magazine.
