Merger deal breakers: when operational due diligence exposes risk

Merger deal breakers: when operational due diligence exposes risk Purpose – The purpose of this of this paper is to show that judging by the number of mergers that still go sour, there is plenty of room to intensify the kind of operational due diligence that can uncover deal‐breaking factors before they destroy shareholder value. The paper focuses on specifically supply chain and IT as the two operations areas that deserve special attention because they still get short shrift. Design/methodology/approach – The paper was written based on survey findings, publicly sourced information, case study work and Accenture's point of view based on work at over 400 M&A client engagements, three quarters with companies in the Global 1000. The two surveys cited are: 2006 Accenture study of supply chain managers; and Third Annual Due Diligence Symposium 2007 Survey. Findings – The paper finds that when senior, experienced operations experts are involved in due diligence and pre‐merger planning, the major risks and potential deal breakers are exposed quickly – before deal momentum pushes things to the point where participants are reluctant to walk away. Also, with this input, deal makers can accurately assess the true investments needed as well as the “to be” operating costs of the joined companies. Those numbers can be used to adjust post‐merger cash flow projections, which are often extrapolated based on percentage estimates and projected top‐down rather than bottom‐up based on major projects under way or on operating model complexity. The operations experts allow new potential sources of value to be identified and considered as part of the valuation of the target company. The purchase price may then be adjusted up or down. Originality/value – Dealmakers have significantly improved their understanding of, and skills in conducting, many elements of mergers and acquisitions, especially valuation and merger integration. Yet in example after example, due diligence processes have proven to be an Achilles heel. Dealmakers today must use every tool at their disposal to improve their odds of a successful deal while at the same time avoiding bad acquisitions. That means placing the same importance on operational due diligence as on valuation, traditional due diligence and merger integration. It also calls for using operational due diligence to pinpoint initiatives that protect and create value after an acquisition. The shift to this next level of due diligence will require enhancing rather than replacing traditional due diligence activities. The due diligence lists will be longer, yes, but importantly, they will be forward‐looking, gauging current observations against future operating needs. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Business Strategy Emerald Publishing

Merger deal breakers: when operational due diligence exposes risk

Loading next page...
 
/lp/emerald-publishing/merger-deal-breakers-when-operational-due-diligence-exposes-risk-lH9l0MgLD1
Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0275-6668
DOI
10.1108/02756660810873182
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this of this paper is to show that judging by the number of mergers that still go sour, there is plenty of room to intensify the kind of operational due diligence that can uncover deal‐breaking factors before they destroy shareholder value. The paper focuses on specifically supply chain and IT as the two operations areas that deserve special attention because they still get short shrift. Design/methodology/approach – The paper was written based on survey findings, publicly sourced information, case study work and Accenture's point of view based on work at over 400 M&A client engagements, three quarters with companies in the Global 1000. The two surveys cited are: 2006 Accenture study of supply chain managers; and Third Annual Due Diligence Symposium 2007 Survey. Findings – The paper finds that when senior, experienced operations experts are involved in due diligence and pre‐merger planning, the major risks and potential deal breakers are exposed quickly – before deal momentum pushes things to the point where participants are reluctant to walk away. Also, with this input, deal makers can accurately assess the true investments needed as well as the “to be” operating costs of the joined companies. Those numbers can be used to adjust post‐merger cash flow projections, which are often extrapolated based on percentage estimates and projected top‐down rather than bottom‐up based on major projects under way or on operating model complexity. The operations experts allow new potential sources of value to be identified and considered as part of the valuation of the target company. The purchase price may then be adjusted up or down. Originality/value – Dealmakers have significantly improved their understanding of, and skills in conducting, many elements of mergers and acquisitions, especially valuation and merger integration. Yet in example after example, due diligence processes have proven to be an Achilles heel. Dealmakers today must use every tool at their disposal to improve their odds of a successful deal while at the same time avoiding bad acquisitions. That means placing the same importance on operational due diligence as on valuation, traditional due diligence and merger integration. It also calls for using operational due diligence to pinpoint initiatives that protect and create value after an acquisition. The shift to this next level of due diligence will require enhancing rather than replacing traditional due diligence activities. The due diligence lists will be longer, yes, but importantly, they will be forward‐looking, gauging current observations against future operating needs.

Journal

Journal of Business StrategyEmerald Publishing

Published: May 2, 2008

Keywords: Acquisitions and mergers; Due diligence

There are no references for this article.

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off