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Published: September 28, 2006

 
 

Strategic Due Diligence: A Foundation for M&A Success

Experienced due diligence and integration managers must be involved in these mergers, and there must be high-profile, executive-level participation from both sides, especially when it is clear that the capture of “best of breed” outcomes requires culture change. A strong analytical team must drive the market and competitive assessment, and the human resources team needs to focus on organizational and cultural issues. If there are areas of consolidation, functional representation is critical to ensure buy-in from management.

The strategic rationale for an in-market consolidation (large target, high integration) is to create a market leader that can realize benefits by improving pricing and marketing, rationalizing operations, and leveraging assets, such as technology and skills. The acquiring company may want to increase market penetration with its products and services, and capture scale benefits within its operations. Most current mergers in the automotive and utility industries fall into this category.

For such a merger, strategic due diligence should focus on assessing potential customer value, including revenue upside and risks; validating synergies and identifying challenges when consolidating areas such as administration, operating infrastructure, and work force; determining which processes and assets are best of breed; and assessing cultural fit and integration risks, such as loss of key people in nonconsolidated areas.

This strategic due diligence team should have strong cross-functional representation from both companies involving managers who will also lead the actual integration. Human resources support is needed to manage the organizational challenges, as is analytical support from corporate headquarters. Ideally, experienced due diligence and integration managers should be involved.

The strategic rationale behind an out-of-market “bolt-on” (small target, low integration) is to create a new platform for growth through a relatively small acquisition. This expansion could be into a new geography — which is common among regional hospitals in the U.S. and mobile telephony — or into entirely new product or service offerings, such as a vertical integration play when a company seeks to broaden its capabilities and leverage its scale.

When geographic diversification is a factor, the rationale for the merger may involve taking advantage of deregulation, “rolling up” small players in a fragmented industry into a more coherent regional or multinational player, or expanding the scope of the business. Most likely, little consolidation will be needed beyond eliminating redundant functions such as corporate staff, information technology, and human resources. Strategic due diligence should include a focus on identifying opportunities to leverage best practices, product development, and infrastructure across the group. Even though these “bolt-ons” may operate fairly independently in the new organization, the purchaser should ask itself about its own “parenting abilities.” What resources can the company use to accelerate growth while preserving the core of what it’s acquiring?

Besides this parenting question, strategic due diligence for an industry buyer should focus on testing the new market’s attractiveness, determining the target’s competitive position, identifying what critical capabilities to retain, and addressing any cultural issues. This due diligence group should include a strong analytical team to drive market and competitive assessment, an HR team to focus on organizational and cross-border cultural issues, and functional representation in areas of coordination.

Likewise, when the out-of-market “bolt-on” involves a financial buyer or conglomerate, the same emphasis should be placed on testing the new market’s attractiveness, ascertaining the target’s competitive position, and retaining key personnel. Cultural differences are unlikely to need addressing beyond creating policy consistency and ensuring the interests of both sides are aligned.

The strategic rationale for an in-market absorption (small target, high integration) is that, by acquiring a competitor in the same market, the buyer can capture operational synergies through leveraging its existing asset base. Markets that often see in-market absorptions are U.S. retail banking, second- and third-tier auto suppliers, and technology acquisitions by the likes of IBM and Cisco Systems.

 
 
 
 
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