Business situation

Acquisitive is finding it hard to produce energy at a sustainable cost. Acquisitive has attempted to diversify its business away from energy production in recent years in case it finds the shifts in consumer behavior are too much to overcome. After this consideration, Acquisitive, Inc., determines it is interested in acquiring Miners and Co., an Australia-based coal mining company that mines coal and sells it to energy companies and steel producers around the world, and hired Deloitte to help assist during the due diligence process of this potential acquisition. Key considerations regarding Miners and Co.’s business are as follows:

• Miners and Co. does not own any mines. Instead, Miners and Co. leases space at mines and pays a variable rate for mines based on the price of coal.
• Miners and Co. leases machines which aid in the mining process.
• Their revenue is highly subject to fluctuations in the commodities price of coal because their contracts pricing is tied to commodities indices. As such, Acquisitive is concerned with the result of a potential downturn.
• Miners and Co. has taken on a significant amount of debt to finance capital intensive mining activities.
• 70% of Miners and Co.'s revenue is attributable to its top five customers, three of which are located in Southeast Asia.
• Miners and Co. receives payment for coal in the currency of their end customer.
• In order to promote bulk ordering, Miners and Co. will offer financing options to its top customers. Their financing receivables are approximately 20% of total assets.
• Miners and Co.’s inventory balance has grown steadily quarter-over-quarter despite flat sales.

Problem statement

A key first step of the diligence process is for the M&A team to understand the client’s (Acquisitive) motivations behind the potential merger (i.e. what the client hopes to gain from the purchase).