SETTING YOUR M&A STRATEGY TO DELIVER REAL VALUE TO YOUR SHAREHOLDERS.
What is the most appropriate merger/acquisition strategy for your business?
To create successful transactions, today’s deal environment demands new levels of creativity and forward thinking from corporate development professionals. Whether the question is where to find targets, how to structure terms, or when and what to communicate with shareholders about a transaction, one sure answer is that what worked yesterday may need to evolve and adapt to an increasingly fast-paced and ever-evolving environment to succeed tomorrow.
When M&A Works as a Growth Strategy Mergers and acquisitions make perfect sense in a variety of situations. For example, maybe an opportunity presents itself that requires fast, decisive action. Or maybe a competitive threat compels a defensive move to get bigger, faster.
WHAT IS DUE DILIGENCE?
Due diligence is a process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all facts, financial information, and to verify anything else that was brought up during an M&A deal or investment process. Due diligence is completed before a deal closes to provide the buyer with an assurance of what they’re getting.
Importance of Due Diligence
Transactions that undergo a due diligence process offer higher chances of success. Due diligence contributes to making informed decisions by enhancing the quality of information available to decision makers.
From a buyer’s perspective
Due diligence allows the buyer to feel more comfortable that his or her expectations regarding the transaction are correct. In mergers and acquisitions (M&A), purchasing a business without doing due diligence substantially increases the risk to the purchaser.
From a seller’s perspective
Due diligence is conducted to provide the purchaser with trust. However, due diligence may also benefit the seller, as going through the rigorous financial examination may, in fact, reveal that the fair market value of the seller is more than what was initially thought to be the case. Therefore, it is not uncommon for sellers to prepare due diligence reports themselves prior to potential transactions.
Reasons For Due Diligence
There are several reasons why due diligence is conducted:
Costs of Due Diligence
The costs of undergoing a due diligence process depend on the scope and duration of the effort, which depends heavily on the complexity of the target company. Costs associated with due diligence are an easily justifiable expense compared to the risks associated with failing to conduct due diligence. Parties involved in the deal determine who bears the expense of due diligence. Both buyer and seller typically pay for their own team of investment bankers, accountants, attorneys, and other consulting personnel.
Why Due Diligence Matters
"Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions"
Due Diligence Activities in an M&A Transaction
There is an exhaustive list of possible due diligence questions to be addressed. Additional questions may be required for industry-specific M&A deals while fewer questions may be required for smaller transactions. Below are typical due diligence questions addressed in an M&A transaction:
1. Target Company Overview
Understanding why the owners of the company are selling the business –
Examining historical financial statements and related financial metrics, with future projections
The quality of the company’s technology and intellectual property
4. Strategic Fit
How the company will fit into the buyer’s organisation
5. Target Base
The company’s target consumer base and the sales pipeline
The company’s management, employee base, and corporate structure
7. Legal Issues
Pending, threatened, or settled litigation
8. Information Technology
Capacity, systems in place, outsourcing agreements, and recovery plan of company’s IT
9. Corporate Matters
Review of organisational documents and corporate records
10. Environmental Issues
Environmental issues that the company faces and how it may affect the company
11. Production Capabilities
Review of the company’s production-related matters
12. Marketing Strategies
Understanding the company’s marketing strategies and arrangements
PART 1: SMALLER M&A deals work out better over time.
Research shows that across most industries, companies with the right capabilities can succeed with a pattern of smaller deals, but in large deals the industry structure plays as much of a role in success as the capabilities of a company and its leadership. As companies get bigger, the ones that get the best returns are those that continue their growth through a strategy of smaller deals, as the big deals can be a bit of hit or miss.
Large Deals: Are more suited to slower growing mature industries as there is great value in reducing excess industry capacity and improving performance, and a lengthy integration effort is less disruptive. Conversely large deals in fast moving and rapidly growing sectors have been less successful, because of the time it takes to integrate the acquisition and companies focus inwardly taking their eye off the ball to some extent on what's happening in the marketplace, maybe missing a new product or upgrade cycle.
Pragmatic Deals: Companies across a variety of industries do well using the programmatic approach. Companies using this strategy completed many acquisitions that together represented a material level of investment. Furthermore the volume effect — the more deals a company did, the higher the probability it would earn excess returns.
PART 2: A strategy that uses CAPABILITIES as the basis for inorganic growth.
— while most other inorganic growth moves have led to a loss of value.
Deals do better when the incoming company matches the acquiring company’s capabilities system. Some industries, such as information technology and retail, show a larger effect; all industries, however, show a consistent, observable capabilities premium in M&A. Deals made with a capabilities perspective are far more likely to generate value over time.
A capabilities system, is something specific: three to six mutually reinforcing, distinctive capabilities that are organised to support and drive the company’s strategy, integrating people, processes, and technologies to produce something of value for customers. they are differentiated and complementary, working together to reliably and consistently deliver a specified outcome, in support of a company’s long-term strategy and market position. These capabilities systems are typically complex and multi functional, and tied closely to the company’s identity; they take a lot of attention and investment to build and maintain. But once in place, they guide a company’s way of creating value in the market and provide distinction and prowess to its products and services.