The due diligence process is like a murder mystery, ask the right questions to uncover the right information to come to the correct decision(s). Also, this should be a collaborative effort with the other side, if it isn’t that should be a warning signal for you. To be successful requires the right people in the process with a well structured plan.
This blog is not a HOW TO rather key things in my experience to avoid or make sure are covered in the process. Due diligence is NOT about just evaluating the price of the deal and potential legal and financial issues alone, it should be about how the desired acquisitions fits your acquisition profile and strategic goals. You can’t evaluate final deal price until you answer the fit question. This part of the process allows you to get a handle on integration planning, management and cost.
How do I develop a plan of attack?
Due diligence is all about seeking answers to critical questions. Aside from the legal and financial questions, the key is developing the right questions to answer or how will this acquisition help us accomplish the goals we established in our Strategic and Acquisition Profile? A number of these questions can and should start in the Front-End process. A major mistake I have seen time and again is poor work during the development process leading to poor due diligence. If you don’t know what exactly you are looking for it’s hard to evaluate a target. What questions are out-of-bounds, NONE. Everyone at this stage should see everything that will be evaluated and ALL the questions that the due diligence team will be seeking answers to.
Who should I involve?
I have seen Leader’s ‘shortchange’ this process from a personnel perspective because they are trying to ‘keep it low profile or manage the cost of the process’ or they don’t want to take people away from their everyday job. WRONG!! Remember Cisco’s formula for success, 60% of success will be driven by good work with the right people during the pre-acquisition phase and 40% on post-acquisition. Each person involved in this process should develop the set of questions they will get answers to for their responsible area. Here is a must have: whomever is going to be responsible for leading integration management has to be part of this process. The major internal people involved here will become part of the integration planning process. Where I have seen this work, the best is when whoever is responsible for leading integration is part of the overall process from the start. To often acquisition is turned over to operating people without clear goals and an integration plan on how to achieve them.
Attorneys and Financial personnel are going to have standardized checklists they will modify for your case. Again, a problem arises when leaders use inexperienced attorneys and finance personnel. Even back in structuring your Letter of Intent, an inexperienced person can cause major problems going forward. Internally think in terms of who can evaluate your goals for the acquisition? Today more so than in the past technology operating systems are critical don’t overlook them even if you have the same systems, they may be utilized differently.
Is speed important to the process?
Yes and no. How do you like that equivocation? You don’t want the process to bog down because time is money, and you don’t want the seller to lose faith in you. Terms for getting to final offer are usually articulated in the LOI, even so you need to be efficient and through at the same time.
How do I evaluate that culture thing?
According to merger studies, the human aspects of M&A’s has been paid little attention and is narrow in scope, usually limited to the functional strengths and weaknesses of the top personnel. This statement reflects a narrow focus on ‘the human aspect’ of the company and the inability to take a broader business perspective. In completing your SWOT you developed a one pager describing how your company competes/operates i.e. ‘behaves’. You need to identify how the target company ‘fits’ accomplishing your strategic and acquisition goals but also how they currently ‘behave/compete’ and how their internal systems and processes support or don’t support everything. This should help you construct the type of information needed and the questions necessary to acquire that information. For example, how do they reward people formally and informally, how do you really get ahead, how does decision making work, how do internal operating processes work? Remember the ‘friendly merger’ I referenced in a previous post about how the respective sales organizations sold? This exemplifies both their differences in competitive strategies but also how they looked at themselves, talked about each other, what they rewarded; ‘high tech, GQ vs. ‘no tech’ blue color.
What’s the elephant in the room?
If there is one thing that can become a ‘monster’ in this entire M&A process, it’s information management. In the early part of the process key information is generated but not in the volume or the disbursement to people as required in due diligence. Very early in the process you should have evaluated and decided on how you will manage the volume of information that you gather throughout the entire process. No matter how small the deal a significant amount of information will be gathered that requires dissemination and evaluation amongst multiple people. Everyone in the process should have access to ‘all’ of it. There may be small segments that you want to block off but otherwise everyone should have access. Virtual Data Room (VDR) should be evaluated, and a decision made at the start of the development process on how you will manage information. I watched a very seasoned executive get called on the carpet and asked why critical information was either not gathered or overlooked in a mountain of poorly organized and disseminated information. The old adage about the value of good information to make good decisions which leads to good plans and decision making still holds true.
When do I switch to integration planning?
The two most common mistakes I have observed during due diligence are not having the people responsible for planning and managing integration involved at this stage and not asking the right questions during due diligence for planning integration. The groundwork for integration planning and management starts now. During due diligence the overall question related to integration of any acquisition that should be answered here is: what will it cost to integrate what are the main hurdles to accomplishing our goals and should we do it? Rule of thumb: when you are 80% certain the deal will get done the integration team should start developing the plan.
In the next blogs I will cover integration planning and management. But first a story. I was contacted by someone in my network inquiring if I was interested in helping a company integrate an acquisition. He told me it was a European company that had acquired a U.S. company twice its size and they were looking for someone to lead the integration. I asked him one question: to your knowledge when did they start the process to prepare for integration. His response was “they waited to deal with integration until after the deal was done”. My response was “thanks but no thanks and good luck to them”.