Operational Due Diligence: Mergers & acquisitions with no surprises

Mergers & acquisitions: A complicated business with many variables.

When a company embarks on a merger or an acquisition it’s always a complicated business.

There could be many different objectives: to increase market share, to set foot in another new and promising market, to diversify risks, to exploit synergies, to achieve critical mass, to raise barriers to entry, etc.

In the background (and sometimes very deep in the background) always lies the idea of ​​improving profitability (or maintaining it) in the medium or long term. And this is usually enough to convince shareholders of the merits of the operation.

But not all mergers or acquisitions give the expected result. A business with many details and variables usually hides surprises and these are often unpleasant. The business world is full of stories of failures, overspending or unsustainable situations that have resulted from an operation of this type.

The main explanation for this is that while mergers and acquisitions are embarked upon for strategic reasons, it is the operations side, and therefore profitability, that is the critical factor. And this is the part the experts have trouble controlling.

Mergers and acquisitions are not only difficult at the time of negotiations, but especially at the time they have to operate in accordance with the approach laid down in the Board table.

Why an operational due diligence is essential

A standard due diligence process generates accurate accounting, financial and other essential information but it is a limited tool so far as predicting operational compatibility and synergy within organisations.

The operational due diligence is an essential tool to complete the accounting and financial information of the company and to prevent nasty operational surprises.

If the planned operation is an acquisition, the operational due diligence provides relevant information on operations, processes, culture and management systems of the company to be acquired. In addition, it will specify the operational, logistical, administrative and commercial performance and their potential for improvement, which can be quantified in projected results.

If the operation is a merger, in addition to all of this information, a synergy analysis is included, giving valuable information on the best way to operate in the future. And finally, detailed information on management values ​​and behaviours at all levels in both organisations will give management the tools needed  to predict, and eventually redirect, issues that arise from different cultural and management styles, which are often the beginning of damaging rifts.

When the operational due diligence is complete, a roadmap for the merger or acquisition is created. This will ensure the success of the operation, minimise conflicts and obstacles and get the highest possible return from day one. It also provides managers with a guide to how to navigate new waters effectively.

Recommendation:

Performing an operational due diligence is essential to control the risk associated with the acquiring or merging with another company. Any company can minimise unpleasant surprises by investing in as little as three or four weeks of intensive work by a team of experts. This is a small investment that will lessen the risk of extra spending and problems later.