You may find, as you begin due diligence, that your processes are incomplete, and your team lacks the expertise to evaluate commercial prospects; technologies; legal issues; manufacturing footprints; procurement concerns; intellectual property; tax questions; regulatory issues; export controls; or issues related to health, safety, and the environment. At the least, you will need detailed standard questionnaires covering these issues; more likely, you will need to bring in experts who can answer questions with confidence.
However, this is not just a matter of finding the right people to help. One large diversified industrial company had a thorough due diligence process with pockets of expertise — but it was not well documented, making it difficult for everyone to coordinate, and for new staff to get up to speed. At one point, the corporate M&A team asked a divisional M&A team to add targets that had already been identified (by the division) as improbable candidates. Another business unit suggested a candidate that was not a good strategic match, but that was located conveniently close to the business unit’s headquarters.
To avoid these types of problems, arrange regular meetings of new business development practitioners across internal boundaries. Document what went well and what did not go well following each transaction, to share with the group. Use these meetings to drive best practice development; share basic information about the market, as well as simple tips and tricks. Create due diligence templates and questionnaires, such as data request templates, so that work can flow seamlessly, even if individual staff members depart in the middle of a project.
5. “Our legacy due diligence team knows what they are doing.” Even experienced due diligence staff may not have the right skills for every deal. It is important to bring in pertinent expertise to fully analyze a given opportunity, especially for adjacent markets, new geographies, and unfamiliar technologies.
In one case involving the acquisition of a technology firm whose primary customer was the U.S. government, due diligence was conducted by a team with very little experience in the defense sector. They correctly pointed out that margins on the target firm’s government business were declining somewhat; however, they failed to discern a coming wave of increased government spending in the company’s key business. The purchaser hesitated, opening the door for another buyer to come in and purchase the company. That competitor rode the wave of growth, enjoying high returns.
M&A is a complex process that requires significant and diverse skills and resources to execute well. By being aware of the trap these common fallacies and self-deceptions present, teams can design and execute an M&A process that is more effective and yields outcomes that consistently create rather than destroy value.
- Barry Jaruzelski is a partner with Booz & Company based in Florham Park, N.J., and the leader of the global engineered products and services practice. He specializes in due diligence, corporate strategy, and transformation of core innovation processes for high technology and industrial clients.
- Marian Mueller is a principal with Booz & Company based in Florham Park, N.J. He serves industrial and automotive clients as well as associated financial investors by focusing on organic growth, mergers and acquisitions, organizational design, emerging market growth, and portfolio management.
- Peter Conway is a senior associate with Booz & Company based in Chicago. He specializes in M&A due diligence and organic growth strategy, as well as helping clients develop the capabilities required for each.
- Also contributing to this article were Booz & Company senior associate Prashant Vishnupad and associates Michael Zarrilli, Tushar Kanungo, and Abhishek Jha.