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Strategic Due Diligence: A Foundation for M&A Success


Three Common Themes of Failure

Strategic due diligence is a challenging task, to put it mildly, and there are any number of ways to veer off course if careful attention is not paid to the work. However, we have identified three “themes of failure” that most often derail due diligence.

1. Failure to Focus on Key Issues

  • Fools Rush In: Time will be tight, but don’t rush through the necessary step of clarifying the rationale for the deal and sources of expected value. This step determines which hypotheses need to be tested and avoids wasting time gathering irrelevant data.
  • Reinventing the Wheel: Don’t be so distracted by the process that the analysis suffers. When possible, use a common diligence methodology, standardized formats, and simple project management software to manage and share relevant diligence data. This will save time, keep the process focused, and thus permit a higher level of analysis.
  • Reluctance to Share: When diligence information is not shared adequately among all diligence teams, it’s impossible to focus effectively on the larger issues at hand. A clear flow of data through the use of regular (as frequent as daily) updates can quickly identify “deal killers”; it can also help the team allocate resources more effectively, and it will lead to a richer and more nuanced view of the diligence issues.
  • Analysis Paralysis: Inevitably, some issues will remain in doubt, but the team must be rigorous about defining an end point for the analysis. Part of being focused is knowing when to check something off the list, when to report it to management, and when to move on.

2. Failure to Identify New Opportunities and Risks

  • The Unquestioned Assumption: Although time constraints prevent any major recasting of a company’s strategy, a quick stress test of management’s key assumptions about its business may show opportunities for growth or a strategic refocus that may create significant value.
  • Being Afraid to Rock the Boat: Even when a deal seems imminent, it is not too late to probe deeply into its merits. Ask the target company’s management both broad and specific questions to gain a deeper understanding of value drivers and key risks. Also, identify and interview customers and the competition. This is all part of reaching sound conclusions on possible trends (such as the emergence of a substitute product or service) and risks (such as the market entry of a new competitor).
  • “It’s Just an Audit”: Due diligence is more than an audit. By validating the assumptions that underpin the business plan and detecting risks or inconsistencies early, diligence aids management’s long-term stewardship of the company.

3. Failure to Allocate Adequate Resources

  • Choosing the Wrong People: The best people for the due diligence team are probably also the company’s most valuable managers. Find a way to put them on the job rather than choosing people who happen to have time available. Also, make sure to choose people with the right expertise; don’t overlook managers from the functional areas of the firm that will be affected by the deal.
  • Insufficient Time: The due diligence process will be a time-crunch affair, but don’t make the problem worse than it is. Give the team as much time as possible, and don’t be trapped by artificial or arbitrary deadlines.
  • Insufficient Resources: Support the due diligence teams with the resources of the firm. This includes space to work, equipment, software, staff, and access to the right data and people. And, as much as possible, relieve them of their daily responsibilities so they can focus on the task at hand.

Author Profiles:

Gerald Adolph ([email protected]) is a senior vice president with Booz Allen Hamilton in New York. His work focuses on corporate and business unit strategy, as well as merger and acquisition issues. Click here for additional information on mergers and restructurings from Booz Allen Hamilton.
Simon Gillies ([email protected]) is a vice president of Booz Allen Hamilton based in Melbourne, Australia. He focuses on assisting Asia Pacific–based clients in corporate strategy development and implementation including mergers and acquisitions.
Joerg Krings ([email protected]) is a vice president with Booz Allen Hamilton and managing partner of the Munich office. He focuses on turnarounds and profit-improvement programs for automotive OEMs, suppliers, and industrial clients.
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