Report on Investigative Procedures Necessary Prior to Central Air’s Acquisition of Pna

Central Air Case

User: Partner (Mergers & Acquisitions)

Role: CA (Mergers & Acquisitions)

Re: Report on Investigative procedures necessary prior to Central Air’s acquisition of PNA

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Sept 15, 2010

Memo

To the Partner (Mergers & Acquisitions),

As per your request, I have reviewed all the information you have provided and have come up with a detailed analysis for the risk and opportunities of PNA’s acquisition. Further to this I have compiled a few due diligence procedures that Central should consider before the acquisition.

Also, since PNA has never been audited in the past, some of their accounting procedure do not comply with IFRS and I have pointed them out with my recommendations below.  

Strategic Aquisition (Opportunities & Risk) for Central Air

Here are some of the opportunities and risks I have determined with the merger of Central Air and PNE taking place.

Opportunities:

1. Since Central Air does not concentrate on customer service, they have been currently suffering a bad reputation with its customers. Added to this was the minor incident where the landing gear did not fully deploy. Though Central was ultimately cleared by the Transportation Safety Board, this incident took an additional toll on their reputation and resulted in a temporary decline in their business.

PNA, on the other hand is Customer oriented and focuses on providing a good customer service to their travelers which has he been their major selling point and their reason for success. They have also won numerous awards in regards to this.

Acquisition of PNA would definitely help build Centrals reputation and give them a good standing in the market.

1. PNA built two terminals on land connected to the main airports in Regina and Saskatoon. By doing so there has been less security, free parking and arrival 15 mins prior to their flight facilities offered to their travelers.

This time saving factor has been their major selling point and the also their main reason of success.

The merger between Central Air and PNA can been proved successful as their Central would learn from PNA on the customer service

Risks:

1. Currently PNA is non-unionized but have engaged in talks with the Canadian Pilots Union. Since PNA is a private company and it is not necessary for their pay scales to be met with the average market salary, it is unclear if upon becoming unionized there might be a large increase in future payrolls. This would later affect Central once merged.

1. Rodney(CEO) and the partners are looking for an exit strategy. Once PNA is sold, Rodney is wanting to retire. Since Rodney has been a major influence for the success of PNA this might prove detrimental to the company as a whole.

1. Central could be at risk with PNA’s thin margins and cash shortfalls. The bank requires a personal guarantee in order to approve the loan. With Rodney planning to leave, it would be risky for Central to take this responsibility on them without getting a clearer picture and understanding of the shortfall.

1. Lease on some of the term can be only extended another term for a price below market rate. Central might face a hike in the lease there after. This could potentially be another risk that Central would need to consider prior to acquisition.

Due Diligence:

Central should ensure the following steps are covered for an acquisition of PNA

1. Central should talk to Rodney and request if he could continue to stay ever after the acquisition, so that he could be around during the initial phase of the acquisition and help in the smooth transitions of various business processes.

1. Central should request PNA to look at their current discussions with Canadian Pilots Union and also take a look at management compensation in order for them to gauge if an increase in payroll would be an issues for them and also if management compensations are inflated

1. Central should check with the terminal authority if the procedures would remain the same even after acquisition of PNA. Since the time saving procedure is their main reason behind their success, Central should confirm if this would continue.

1. Central should talk to First Nation band who own 49% of PNA, to gauge where they are at with their decision. It would be beneficial for the First Nation band to continue on and if they are unsure Central should factor in this risk.

1. A leak in fuel storage talk raises a major concern on the safety of the flight. Upon acquisition such incidents could ruin the reputation of Central. Central should have a thorough inspection done and understand the reason behind this leak. If inspection was already carried out by PNA, reports should be requested and thoroughly read.

1. Since PNA has never been audited, Central should interview PNA’s Accounting teams and also request financial for the past 2 years. Central should check to see if the Accounting team can uncover any unknown transactions.

1. Central should also check the BOD meeting minutes in order to understand any major decisions over the past year.

1. Central should contact the bank and get an understanding on the financing requested and any debt covenants         put in place.

1. Central should request recent past rental income details on PNA’s additional building rented out. This way Central can confirm if there has been a steady rental income flowing into the company.

1. Central should request lease agreement from PNA and a quote on the price increase from the lessor. Central should be sure the price hike would be feasible after the acquisition.

Accounting Issues:

Lease

Issue:

Some of PNA’s leased planes are currently expensed