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Mergers and Acquisitions: Due Diligence as a Driver of Success

Successful mergers and acquisitions require a keen due diligence process to ensure your company integrates smoothly.

The due diligence process is key to successful mergers and acquisitions, providing information that your company requires for a smooth integration.

Key Takeaways
  • CFOs should play a lead role in projecting and/or modeling the prospective value of a merger/acquisition.

  • The essence of effective due diligence for value realization is having a proper scope, good planning, and thorough execution.

  • Include soft data as a key component of the due diligence process, including insight into such elements as the target company's structure, operations, culture, and customer relationships.

380x290 Mergers and Acquisitions

According to Deloitte, only about 30 percent of mergers and acquisitions deliver their anticipated value. Why do mergers and acquisitions (M&As) fail to deliver? Many times, the failure can be attributed to a lack of due diligence.

The CFO has an important function as a company's "steward of value," and nowhere is this role more important than during M&As. According to Deloitte, the buy-side CFO can steward value capture by fully analyzing "transaction risk through the identification, quantification, and substantiation of value drivers or value inhibitors."
 
Ask the Right Questions
Due diligence ensures that you know what you're buying. As GE Capital's Christopher Smith, who worked for four-plus years as vice president of integrations, explains: "Due diligence is especially important when the target company is an adjacency, not directly connected with your core business. You'll have more risk because you may not be familiar with its suppliers, customers, or intellectual property, and so you'll have more need to retain key people." Specific important questions that your due diligence team should consider include:
  • Do the target's financial statements accurately reflect its financial condition?
  • Is the target company exposed to unexpected and significant regulatory, governance, or liability risks?
  • Are there any factors uncovered during the due diligence process that alter the initial valuation?
  • What's the quality of the company's management team and their level of commitment to the integration?
"You should also be asking questions to understand the business culture of the target company," notes Smith. "Even seemingly small things like job-sharing practices, the benefits offered, or free coffee can be important to culture. You want to start the integration with a full understanding of the target's culture so as to avoid surprises."
 
Visit the Target Company In Person
Even though you can do much of your evaluation virtually, you and your team should make sure to visit the target in person. Walking the floor and engaging in face-to-face communication with key people is vital to facilitating the integration process. As Smith notes, over-communication is generally far better than under-communication: "Don't assume that people [within the target company] know anything. Share the information you can share."
 
Realistically Assess Your In-House Capabilities
If you don't have available and sufficient talent in the areas of finance, law, and operations to perform the necessary steps of due diligence, seek outside help from specialists. It's also wise to include your integration manager on the due diligence team, which will enable said manager to become familiar with the target and hit the ground running when integration efforts begin. Smith stresses the importance of having functional representation from the beginning of the deal. In order to do a proper valuation and integration, says Smith, "you'll need to have people from IT, operations, tax, etc., at the table from the time the deal is being considered."