Merger deal breakers: when operational due diligence exposes risk

Abstract

Purpose

The purpose of this of this paper is to show that judging by the number of mergers that still go sour, there is plenty of room to intensify the kind of operational due diligence that can uncover deal‐breaking factors before they destroy shareholder value. The paper focuses on specifically supply chain and IT as the two operations areas that deserve special attention because they still get short shrift.

Design/methodology/approach

The paper was written based on survey findings, publicly sourced information, case study work and Accenture's point of view based on work at over 400 M&A client engagements, three quarters with companies in the Global 1000. The two surveys cited are: 2006 Accenture study of supply chain managers; and Third Annual Due Diligence Symposium 2007 Survey.

Findings

The paper finds that when senior, experienced operations experts are involved in due diligence and pre‐merger planning, the major risks and potential deal breakers are exposed quickly – before deal momentum pushes things to the point where participants are reluctant to walk away. Also, with this input, deal makers can accurately assess the true investments needed as well as the “to be” operating costs of the joined companies. Those numbers can be used to adjust post‐merger cash flow projections, which are often extrapolated based on percentage estimates and projected top‐down rather than bottom‐up based on major projects under way or on operating model complexity. The operations experts allow new potential sources of value to be identified and considered as part of the valuation of the target company. The purchase price may then be adjusted up or down.

Originality/value

Dealmakers have significantly improved their understanding of, and skills in conducting, many elements of mergers and acquisitions, especially valuation and merger integration. Yet in example after example, due diligence processes have proven to be an Achilles heel. Dealmakers today must use every tool at their disposal to improve their odds of a successful deal while at the same time avoiding bad acquisitions. That means placing the same importance on operational due diligence as on valuation, traditional due diligence and merger integration. It also calls for using operational due diligence to pinpoint initiatives that protect and create value after an acquisition. The shift to this next level of due diligence will require enhancing rather than replacing traditional due diligence activities. The due diligence lists will be longer, yes, but importantly, they will be forward‐looking, gauging current observations against future operating needs.

Citation

Morrison, N.J., Kinley, G. and Ficery, K.L. (2008), "Merger deal breakers: when operational due diligence exposes risk", Journal of Business Strategy, Vol. 29 No. 3, pp. 23-28. https://doi.org/10.1108/02756660810873182