By Kresimir Peharda, Partner.
Statistics vary but we do know that a great deal of acquisitions do not produce the results the buyer expected. According to the June 2016 issue of Harvard Business Review, 70-90% of M&A deals do not meet expectations. While there are many reasons why this can happen I want to focus on two areas: due diligence and synergy.
Due Diligence
There is evidence from M&A surveys that buyers do not perform sufficient due diligence. Too many clients think of diligence as a check the box activity that produces little real value. One of the reasons for this is that the amount of time and money is often insufficient to uncover the risks and not so obvious issues of the business to be acquired.
Holistic thinking is required in order to consider the implications of data from legal, financial, business, tax and other diligence areas.
Commercial Diligence
In the case of a B2B acquisition of an existing business, an analysis of customer views and attitudes is critical. This, however, is no easy task as sellers are reluctant to allow potential buyers to interrogate their best customers. Thoughtful commercial diligence is required to unearth potential problems such as:
- Loss of key customer accounts
- Price concessions required to keep customers
- Pressure from a competitor
- Market challenges
Some specific ways to look for and analyze the available data include:
- Net promoter score,
- Voice of the Customer, and
- Strengths, Weaknesses, Opportunities and Threats analysis
Legal Diligence
If an existing business is the target then an examination of employment agreements for key executives and a review of material contracts (other than trade agreements) is imperative.
Thoughtful analysis combining real time facts with contractual provisions is required to reveal potential landmines including:
- Trade agreements not assignable to a new entity
- Triggers in contractual provisions that have a drastic financial impact
- Loss of key employees and competition from departing executives
- Muddled IP rights
Synergy
There are many reasons to pursue an acquisition strategy. These include:
- Synergy
- Product diversification
- Market expansion
- Increasing pricing power
- Eliminating a competitor
The focus of this discussion is synergy. It is easy to think that simply reducing staff or combining assets will yield measurable results. Overly aggressive assumptions in the due diligence process can generate this view. The focus instead should be on how the two companies can better serve the customer. More precisely, in the framework described by Dan McKone and Alan Lewis, authors of Edge Strategy: A New Mindset for Profitable Growth, the question should be: Can the combined assets be used to expand products or service offerings?
Questions to Ask
According to Lewis and McKone, when considering potential synergies parties should ask themselves the following:
- Who besides a competitor would pay to access my assets?
- In the absence of a deal, would the acquiree pay for access to my assets?
Executives feeling the pressure to improve revenues or profitability through a synergistic acquisition would be well served in applying the preceding framework to their process. Proper framing of strategic issues combined with thorough due diligence can assist buyers in achieving greater success in their M&A activity.