THE
IMPORTANCE OF DUE DILIGENCE IN AN ENTERPRISE RESTRUCTURING PROGRAMME|
PRESS RELEASE For immediate Release Wednesday 28th June 2004 1. As a contribution to informed debate on privatisation and restructuring of state-owned enterprises in Lesotho, the Privatisation Unit is offering this short note on the subject of Due Diligence. Due Diligence forms one of the crucial elements of any enterprise’s restructuring process, and is undertaken by the Privatisation Unit for all enterprises in the Privatisation Portfolio (which is approved by Cabinet). Such a Study normally takes place at the start of every privatisation or restructuring process. Potential investors also conduct a Due Diligence study at the bidding stage of the transaction. The term, Due Diligence, is usually associated with contracts or investment decisions and, in general, means that proper efforts will be made in investigations or examinations of information provided in a given transaction. Specifically, the Due Diligence report is a thorough examination of the enterprise in all its aspects. It can be broken down into three constituent components: the Financial/Commercial Due Diligence, the Legal Due Diligence, and the Human Resources Due Diligence. Due Diligence is particularly useful in preparing a Privatisation Scheme. The Privatisation Scheme is an outline of the proposed method of privatisation, which has to be approved by Cabinet before bids are invited for Strategic Investors in the enterprises. Due Diligence can also provide an indicative figure Government can expect to receive from the sale of the enterprise, based upon an objective and professional analysis of the enterprise. 2. The Financial Due Diligence can be compared to an Audit of the particular enterprise to determine its financial situation including a very detailed listing of all its assets and of liabilities by category such as operating expenses, loan debts and so on. The Legal Due Diligence encompasses a review of the legislation establishing the enterprise and the provisions for its governance, and any other laws affecting the enterprise. It also includes a review of current contractual obligations both short-term and long-term. Also included are pending cases involving the enterprise. The Human Resources Due Diligence is a detailed examination of the employee complement of the enterprise at all levels together with analysis of their terms of reference, deployment, qualifications, and other relevant details. This exercise culminates with an assessment of whether there is a need for right-sizing of the staff complement. In most sectors there are indicative ratios of staff to key performance criteria which are used to determine the adequacy or otherwise of staff qualifications and numbers. 3. International and local consultants on behalf of the Privatisation Unit normally carry out the Due Diligence study. In the case of Telecom Lesotho, Due Diligence studies were carried out by PriceWaterhouseCoopers (Financial and HR), Clifford Chance (Regulatory and Competition) and Edward Nathan & Friedland (Legal). These studies were then incorporated into the Information Memorandum for potential investors. 4. If the
Privatisation Scheme is approved by Cabinet, it is then advertised, and
serious bidders are allowed unrestricted access into the enterprise, and
accorded the right to scrutinise in detail all the operations and
records of the enterprise. In other words, the bidders conduct their own
Due Diligence so that they may prepare realistic bids and verify
information provided by the Government in its Information Memorandum.
The cost of this work can often reach M1million, but is an essential
part of a bidder’s investigations into the nature and viability of the
enterprise on offer. It is upon the results of their own Due Diligence,
that the investor will make a decision whether or not to bid for the
enterprise. PRIVATISATION UNIT |
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