A steel service center ("Buyer"), providing slit-to-length premium steel coils and other value-added products, was considering the purchase of a large customer ("Target") who had filed for bankruptcy.

The Buyer was unfamiliar with the acquisition of a business in bankruptcy and was concerned about the extent of the fraud/theft that led to the failure of the business.

Additionally, the Buyer was concerned with customer base retention post-bankruptcy and the potential impact on the future of the business.

The Target was a $40 million manufacturer of steel tubing for agricultural and industrial use that operated out of two plants in the Midwest.

A material fraud (several million dollars) had occurred, involving former employees.  The result was that inventories, sales, and accounts receivable were materially misstated and historical data was unreliable. 

FDP was engaged by the Buyer ten days before the bankruptcy bid date to perform due diligence and assist with the development of the bid and APA response.

FDP's review included:

–  Detailed analyses and valuation of accounts receivable, inventories, fixed assets, and facilities, despite the lack of credible information;

–  Thorough assessment of operations, management, information systems, and internal controls;

–  Preparation of detailed Pro-forma financial statements, which formed the basis of the offer; and

–  Performance of an in-depth review of management's costs accounting methodology and pricing strategies.

FDP's recommendations included:

–  A purchase price reduction of $1 million versus what the Buyer had previously considered;

–  Consolidation of 2 plants into 1 to reduce duplicate costs and unnecessary material transfers; and

–  Immediate hiring of a new GM and Controller.

On short notice, FDP mobilized an experienced due diligence team that determined relative profitability, asset value, and other significant operating issues.

While a stalking horse bidder was initially lined up before the bankruptcy, FDP assisted the Buyer in determining a path forward to capture intrinsic value and bid at a price that would produce an acceptable return on investment.

The Buyer was the successful bidder at a value of $1 million less than they had previously valued the Target.