I find it intriguing that so many firms planning to grow by acquisition do not fully consider the full range of diligence that could and should be carried out on their intended targets. I know that due diligence can be an expensive process but, consider the alternatives. Get it wrong and the risks and consequential costs can escalate exponentially.
All firms realise the importance of legal and financial diligence but in the haste to complete a deal the process of confirming (or not) that the company’s business plan is achievable is often glossed over. Good Operational Due Diligence (ODD) will confirm the viability of the firm’s business plan based on available resources and planned capital expenditures. It may also find potential for additional value to be generated from the target company by improving its operations, consolidating services, etc. Finally, ODD will highlight any serious operational risks that might cause the deal to be renegotiated or even aborted.
Types of Diligence
- Commercial Due Diligence (CDD) – Assesses the target company’s commercial status through a review of its market position, products and services.
- Financial Due Diligence (FDD) – Reviews the target company’s financial status.
- Human Capital Due Diligence (HCDD) – An analysis and assessment of the key staff in the target business.
- Intellectual Property Due Diligence (IPDD) – A highly specialized review and assessment of a firm’s intellectual property.
- IT Due Diligence (ITDD) – A complete and thorough review of the target’s IT infrastructure, spend, security and licensing.
- Operational Due Diligence (ODD) – Concentrates on downside risks; Often focused on detailed analysis of supply chain, engineering, and manufacturing operations of a target acquisition in detail.
I have been involved in many M&A projects. I have seen projects where, due to the lack of investment immediately before and during the acquisition process, the net book value (NBV) of the target firm’s infrastructure is a fraction of the anticipated value. Had we not been involved, the buyer would have paid significantly more than they did. I have also seen situations where, through inadequate HCDD, the post acquisition integration failed because no one thought to ensure that the new team was fully bought in to the deal.
Have you been involved in an acquisition or a merger that have gone wrong? What would you have done differently to avoid the mistakes?