Due diligence commonly refers to a procedure of assessing a business scenario from all dimensions before making a decision of buying or selling.
Commonly due diligence is performed before buying a business in conjunction with an in-depth and methodological investigation to review the key components of the concerned business and real-time investigation revelations are communicated.
- Evaluation and structuring of a transaction
- Confirming/verifying representations and warranties
- Validating the business plan
- An efficient transaction management
This wide scope of the due diligence process boils down the its aspects to: financial, legal, forensic, taxation and organisational. These aspects give an overall picture of the financial health, legal risks, company reputation (goodwill and general image), tax liabilities and ensuring no post-acquisition fallouts.
However, the most common essential element of all the above mentioned aspects is human. It would be interesting to know that many “human” elements are at play during mergers and acquisitions, and ignoring or paying attention to them can respectively decrease or increase your chances of success. The target company’s strategy, culture, leadership, competencies, organisational structure and processes are the most critical elements that need to be assessed.
Generally, a merger or acquisition can at times be an impulsive game for the fear of losing out the company to a competitor. It involves seeking advice from investment banks, consulting firms and lawyers as they are the parameters that can quantify the situation and give an absolute numerical and legal projection which are the supposed building blocks of a smart due diligence process.
Seeing the positives forecasts, a majority of businesses or investors go ahead with this “great” opportunity which requires substantial arm twisting and injecting lots of money. Thereafter, buyers sit happily on this pile of money and wait for synergies to materialise.
In contrast, three years on, the promised synergies seem to break their vow and the analytics of the consulting firm come across as false and many of their assumptions were flawed. The expected economies of scale do not deliver their value and the scope of the synergy narrows down. After continuous sessions of brainstorming, it is discovered that no transition plan had been prepared.
As a result, the company share prices reach an all time low and the shareholders are restless. So, what exactly is the missing piece?
The missing piece was about a cultural difference which was not discussed and stirred feelings of distrust on part of the acquired company, giving way to kaput executive alignment which results in the off-boarding of many talented people especially to join the competitive wing.
Seemingly a poor financial decision which did not take into account the deal’s viability.
People are generally resistant to change and need to be brushed up with a transition plan which needs to be steered by the company leadership. This instills a sense of belonging and confidence and leaves no room for an inferiority complex among the existing and on-boarding employees. Research shows that majority of M&As reduce the competitive landscape, discourage customers and demolish the existing financial harmony and transparency.
Moreover, to make such business deals successful, it requires a high degree of trust between the merging parties. Anxiety, doubt and unwillingness needs to be ironed out of the people by drafting a universal vision and mission statement which will be operated on a set of mutually agreed value system.