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(originally published by Booz & Company)


Strategic Due Diligence: A Foundation for M&A Success

The buyer is likely to be focused on eliminating excess capacity by closing plants, merging sales, reducing overhead, improving market pricing, boosting utilization rates to increase the return on assets, and absorbing the acquired business as efficiently as possible. Therefore, the strategic due diligence focus should be on validating these assumptions, pursuing ways to accelerate synergies, and assessing potential customer and competitor responses that may impact market upside and risk.

In this case, the due diligence team should be drawn principally from the acquirer to ensure ownership of integration goals. The team should be cross-functional with a strong operational focus. Involvement of senior (or chief) human resources and information technology executives is often critical in managing work-force reduction and system integration.

Realizing Full Potential
Strategic due diligence requires an up-front investment of money as well as the time of some of a company’s most capable managers — even before the deal is certain. Indeed, the team should be carefully structured to guarantee the right skill set and influence; and it should be established early enough to kill the transaction if it determines that the strategic rationale and hoped-for synergies simply are not attainable. But the advantages of strategic due diligence go well beyond the ability to stop an ill-conceived deal. If the deal moves forward, the full benefits of strategic due diligence will manifest themselves.

First, strategic due diligence can help set the value and purchase price of the deal. Second, it can help articulate and buttress the strategic rationale for the deal, instilling greater confidence among stakeholders that the company’s claims about projected benefits are reasonable and attainable. Finally, strategic due diligence provides a strong platform for the actual integration.

All these benefits depend, however, on management’s ability to approach each deal as new. The power of strategic due diligence is its focus on the specifics of the deal. We are not saying companies must reinvent the whole wheel for every deal, but they must not reuse too many old spokes. Strategic due diligence acknowledges the unique nature of every deal and offers a path to realizing each transaction’s full potential.

Building the Diligence Team

The value of strategic due diligence relies heavily on the quality of the team in charge of the process. Building a strong team is important both to ensure proper assessment of the deal and to facilitate the actual integration.

We have identified eight best practices for organizing a due diligence team:

  1. Choose the right people who have time to lead the project and serve as team members. Time constraints and confidentiality will make it difficult to replace these people later in the process. Dedicate specific team resources for the due diligence period.
  2. Diligence will naturally focus on certain functional areas. Human resources, information technology, finance, operations, and even R&D and marketing may all be involved. Be sure to draw team members from all of these areas of the organization. This adds valuable expertise, and it helps the team attain the buy-in from line management that can be hard to get if a key functional area is shut out of the integration process.
  3. Ensure that the diligence team is co-located within a secure environment, such as a corporate headquarters. Sometimes it makes more sense to locate the team near the target.
  4. Communicate to the due diligence team the strategic and financial rationale behind the acquisition. They should understand enough detail to be able to identify critical diligence issues.
  5. Train the team to identify and home in on specific issues, including the analysis and data required. This ongoing checklist keeps the diligence on track and brings it to a conclusion. It thus helps to avoid the “analysis paralysis” that can result from an undirected data search.
  6. Develop and communicate rules of engagement between the diligence team and the target company. This avoids cultural conflicts and ensures that the team acts in a manner that reflects the acquirer’s intentions.
  7. Make available analytical tools and techniques so the team can rapidly get its arms around potential synergies and integration challenges. This helps the team complete its task within the allotted time and budget.
  8. There must be a healthy flow of information from the due diligence team to the integration team. Therefore, include diligence team members in the integration planning team to ensure that diligence rationale and data analysis are properly leveraged.

Although many of these best practices apply in all merger cases, there are some differences in focus depending on the nature of the merger. For example, in an out-of-market transformation, it’s important that the team include those with human resources skills who can identify and retain the personnel who will drive value, as well as commercial people who can analyze product and customer profitability in these new markets. For an in-market absorption, on the other hand, human resources skills are critical to planning and coping with the impact of head-count reductions. But the diligence team must also include commercial, operational, and administrative people who can assess the potential value and timing of synergies after the merger.

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