Why is an Integrated M&A Due Diligence necessary

Most M&A Due Diligence fail to projected right synergies numbers

Majority of the M&A due diligence deals fail to deliver their synergies targets.In most of the cases, they fail to project the right synergies numbers and overestimate the target numbers.This is because they approach due diligence as a series of unrelated questions targeting issues such as potential cost reduction or potential area of expansion.
The entire due diligence activity is structured as a series of discrete questions about company’s strategy and its cost structure as if there is no link between these two.The functional due diligence – HR, Finance, Tax and Operational happens in silos which limits the buyer’s understanding of how different aspects of business are related to each other.

Integrated M&A Due Diligence

  • Successful acquirers use an integrated M&A Due Diligence by building a 360 degree view of the target company’s potential, considering interdependencies between strategy and operations and then quantifying their impact.Integrated due diligence does not consider any operational moves in a vacuum. Instead every move is evaluated in the context of the company’s market opportunity, its competitive advantage and management bandwidth.
  • When the due diligence is integrated, then this would lead to a different set of questions.Rather than the due diligence focusing only on the potential of the cost savings, the integrated due diligence would focus on how cutting cost would affect the business operations as well as the potential to expand business operations.
  • Most firms no longer have due diligence as an unified inquiry. They divide their due diligence between the internal resources and external consultants with limited discussions of how findings from one group might affect the conclusions from another.For instance, one person might perform a strategic assessment that gauges market opportunities while other performs operational due diligence looking at areas like supply chain, pricing or technology readiness. Both the advisers do not compare notes or share intelligence.
  • The above segmentation can create blind spots because it fails to take into account the interdependencies between strategy, operations and commercial capabilities.

Focus areas of Integrated M&A Due Diligence

  • Integrated Due Diligence mainly focus on Strategy, Operations and Commercial excellence. The analysis are synthesized into a single unified assessment of value potential.Hence the firms would make the operational projections which are aligned with strategic considerations.This also sets up the right discussions with management on trade offs between priorities and opportunities that can be achieved realistically.
  • When launching an integrated due diligence, the teams need to assume that there will be interdependencies among themselves when doing different aspects of due diligence. In order to succeed, communication is critical.The deal team and the external consultants need to work together on a regular basis to finalize on the overall plans and projections.

Making the right choices

  • Once the due diligence team is able to assess how the interplay of strategy, operations and commercial abilities affects the future value, then the right decision can be taken.It also helps the buyer to understand how decisions in one area of the business would change the assumptions in another.
  • For instance, when evaluating a target company, the integrated due diligence would involve in diagnosing market opportunities, its growth potential, broader distribution of the current products, potential in expansion to adjacent market and expand geographically to accelerate the company’s revenues.Apart from that, one should also assess the target company’s commercial excellence – its strength of customer/supplier/partners relationships, effectiveness of salesforce and quality of its products.
  • Finally the due diligence should examine the firm’s cost structure to identify opportunities in saving costs to reorganize the operating model to find efficiencies.
  • By Integrating all the different aspects into an unified analysis, we can identify a spectrum of potential outcomes based on a mix of revenues and cost opportunities.For instance one recommendation would be to reduce costs, improve EBITDA but grow at single digits.This recommendation can be low risk but also a low growth option.Another recommendation would be to invest in nascent markets which can give high growth followed by high EBITDA but is equally a high risk option.

Why Integrated M&A Due diligence is critical

  • Finding a way to generate growth and increase margins is crucial. This is because valuation multiples are already at record high and there are higher chances of an economic downturn.Hence the returns for the deal that isn’t supported by real business improvements will likely come under pressure.

Final Takeaway

  • Most companies are undergoing rapid technological disruption which are shifting profit pools creating a new pool of winners and losers.Hence it becomes all the more important for companies to alter its strategy, strengthen operations and manage costs in a way that are highly interdependent.
  • Integrated M&A due diligence is the only way to understand how pulling a lever in one area of business will affect assumptions in another.This allows the buyers to create a solid value creation plan that identifies full potential vision for the target business and costs/time/efforts to be undertaken to reach that position.