Making M&A Less Risky: The Influence of Due Diligence Processes on Strategic Investment Decision Making

Abstract

It is well recognized that Mergers and Acquisitions (M&A) are important and popular ways of achieving corporate growth. Motivations include a search for monopolistic power and growth, desire to respond to a low level of profitability in the existing business portfolio, improvement of market position, filling out product line, protection of supply or distribution, gain of control, acquire what is available, to internationalize, or to reduce risk. However, M&A strategies are not risk-free, and arguably one of the CEOs greatest challenges. The last several decades have witnessed a surge of interest in top executives. The strategic choice ranks as one of the dominant roles and responsibilities of senior management. Executives’ experiences, values, and personalities greatly influence their interpretations of the situations they face and, in turn, affect their choices (Hambrick, 2007).

Over the past few years, sad stories of M&A failures have been reported and that can be attributed to poor synergy, bad timing, cultural issues, hubris, complexity, and ineffective strategic control mechanisms including poor due diligence process. M&A strategies require a series of choices made over time by actors at various organizational levels; therefore, it cannot be seen as an independent activity but as an integral part of the formal rational procedure as well as the cognitive process. Strategic cognition plays a very important role in the diagnosis of strategic issues and the formulation of problems (Schwenk, 1988). Pre-decision control mechanisms permeate all levels of strategic investments process to ensure that the investment decision aligns with organizational strategy (Alkaraan & Northcott, 2007). Due diligence processes are comprehensive appraisal of strategic investment opportunities undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential. Due diligence processes refer to 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.

This chapter explores the influence of due diligence processes on strategic investment decision-making (SIDM) processes. Further, it provides strategic insights and practical thinking that have influenced some of the world’s leading organizations. Furthermore, the chapter adopts a strategic perspective on M&A, particular attention has been paid to the influence of due diligence and other related strategic control mechanisms on SIDM processes.

Citation

Alkaraan, F. (2019), "Making M&A Less Risky: The Influence of Due Diligence Processes on Strategic Investment Decision Making", Cooper, C.L. and Finkelstein, S. (Ed.) Advances in Mergers and Acquisitions (Advances in Mergers and Acquisitions, Vol. 18), Emerald Publishing Limited, Leeds, pp. 99-110. https://doi.org/10.1108/S1479-361X20190000018007