One of the most important tips in the world of acquisitions and mergers is not to be stingy in performing due diligence and a detailed study of the target company to be merged or acquired.
The formation of an M&A strategy is an important challenge from a conceptual point of view. Carrying out due diligence is equally challenging, but from a more practical perspective. After the company has defined its business goals, it should begin to explore factors such as the technology mix and employee culture of the company it is acquiring, which will lead to the process of building a roadmap based on what has been discovered. This card will complete the transaction and if successful, provide an integration checklist.
The most important elements of exploration are:
commercial due diligence
The acquiring company is analyzing how Target fills its niche in its market, and how that market may evolve as this deal is incorporated, focusing on how it fits into the buyer’s underlying plans.
Predicting unprecedented events that will affect companies in the future is difficult, but business due diligence can help you anticipate market shifts and other factors that affect the valuation of mergers and acquisitions. Even if you are buying a company for a single purpose, such as acquiring talented software engineers, it is important that you understand how its products or services will be positioned in the market, as this will affect the valuation of the deal. influence. Which can change the main reason for the acquisition to include new images and fields.
Even the smartest companies can make mistakes when it comes to business due diligence. Google and Microsoft made big mistakes buying smartphone makers Motorola and Nokia in the 2000s, miscalculating the impact they would have in the highly competitive market for these products.
Financial due diligence
The acquiring company checks the financial information of the target company, including sales, rates of return, accounts receivable and inventory.
Mergers and acquisitions can fail when financial due diligence is inaccurate. For example, insufficient financial due diligence was blamed when Bank of America acquired Countrywide in 2008 in the months before the housing market crash that triggered the global financial crisis. The banking giant did not fully understand the magnitude of the losses the mortgage originator faced, which would eventually cost it more than $40 billion.
Another essential feature of the financial due diligence and pre-closing process is the evaluation of the target company. This is critical as it helps determine the criteria for whether a transaction was successful. If you can properly evaluate the company, the integration part becomes easier.
If the company is overvalued, it can also affect other elements of the deal. For example, key employee retention bonuses that the buyer agrees to pay on the base agreement may be inflated.
Or consider what happened when Time Warner was acquired by America Online in 2000 in an ill-fated deal. The world’s largest Internet service provider was then valued at $226 billion. But just months later, the Internet bubble burst and that valuation fell to about $20 billion, causing huge losses for investors and stakeholders and undermining any benefits from the merger.
Operational Due Diligence
The buyer checks the target company’s business model and operations to determine if it is suitable for the buyer.
This is where reality can undermine a great story if you don’t do enough research. For example, Daimler-Benz AG and Chrysler Corporation planned to create a global giant when they came together in the auto industry’s biggest merger in 1998, but then discovered that their two different cultures could not be easily combined. The way CEOs worked in Germany differed from the way they worked in Detroit, and their visions of their companies differed, holding back the two partners’ ambitions to become the biggest and strongest players in the market .
David Kreis, a consultant who joined Toptal in 2019, says a lot of operational due diligence is about adapting technologies. What companies often fail to realize, he says, is that they need to know how to integrate both the new technology and the people who developed and maintained it into the ecosystem. “IT systems integration is huge,” says Chris. But it’s all about systems and people together.” It can be a start-up with a distinct product that operates with a mindset that is not consistent with a large company that operates in a more institutional manner.
Family businesses can also be a challenge. According to Daniel van der Vlet, executive director of the Smith Family Business Initiative at Cornell SC Johnson Business School, family businesses offer an attractive combination of stable growth, deep cash reserves and the ability to move quickly into opportunities. But when employee loyalty revolves around a family identity, or even specific family members, the transitions are more difficult. “Family businesses can have a very strong culture, which is often a reflection of the family itself,” says van der Vlet. If it’s taken care of properly, it can be a huge benefit, but it can also be detrimental if you try to mess with it too often.”
In addition to traditional discretion, buyers must determine how long it will take to appoint a founder or family member in the transition process. This decision is often critical to a successful integration, but it can also be where conflicts arise as changes are made at work.
Failure to fully document negotiations is another common midmarket pitfall during the discovery process, according to Brandon Perlman, director of programs and technology. When he sold his energy information business to a larger industry player, Perelman says there was only high-level documentation of planned regulatory changes, without details on issues like staffing and budget. These omissions later led to controversies. “It’s very easy to forget important details or change your mind when making verbal agreements,” says Perelman. Documentation keeps everyone honest.”