ADDING SUBSTANTIAL DEAL VALUE
The Success or Failure of an acquisition lies above all other things in the combination of (A) the price paid and (B) the possibilities to create value post-deal.
The primary focus of Commercial Due Diligence (‘CDD’) is identifying the ‘unsaid’ in the Target’s information provided and to challenge the ‘said’. Findings from CDD could uncover significant and deal-breaking risks and/or issues to the prospective buyer but also point to unnoticed product or market opportunities, cost savings or synergies.
According to various researchers many deals still fail to deliver the expected returns of the investment case and they try to find underlying root-causes in order to understand why.
Figure 1; About half of deals fail to deliver expected returns
Source: Analyses based on European Acquisition Success Study and Bain
Answering this question, research findings point to the middle of the deal process. More unambiguous, it points to the unfortunate lack of having CDD activities performed on top of the almost indispensable Financial Due Diligence scope, while these activities appear to add substantial deal value.
As Harvard Business Review (2011) puts it, diligent review of the business model prior to making the deal is key to deliver expected returns. As the scope of Commercial Due Diligence is focused on providing an independent review of crucial elements which create or diminish deal value, Commercial Due Diligence should be regarded the ‘bulls-eye’ or focal point in deal making (or deal breaking for that matter) passed the non-binding-offer stage in the deal.
MID MARKET DEALS
Especially in the mid-market environment there is less room to absorb a bad deal, supporting the argument that in mid-market deals even more diligence should be taken before a deal is made. According to a study by Deloitte (2012), mid-market corporates evaluating potential M&A targets should carefully consider 4 key factors in order to decide to close the deal or walk away;
- Strategic fit when it comes to products, markets and culture
- Root cause of depressed or bloated earnings
- Probability of improved financial performance
- Identification and attainability of potential synergies
Typically, all these 4 factors are elements of the scope of Commercial Due Diligence.
THE DEVIL’S ADVOCATE
The core added values of Commercial Due Diligence are significant; (A) findings could identify potential deal-breaking risks or issues which could entice you to walk away from the deal, (B) with the evidenced argumentation you have a potentially larger ‘deck of cards’ to negotiate a better price, (C) the identified profitability improvements, synergies and/or upsides will support your valuation (and potentially provides you with insides other buyers might not have, improving the ‘odds’ you can close the deal) and lastly, (D) having CDD activities performed by an independent advisory firm allows your team to move faster and quickly develop a solid understanding of your target and its market.
Figure 2; Key Sources of Value Add through Strategic Due Diligence
Source: De Strategie Compagnie
An often overlooked but valuable argument is the ‘second opinion’ nature CDD findings provide to the acquirer’s investment team. Not rarely, investment teams find themselves trapped in argumentation to rationalise the deal internally, while a third-party performed CDD supports internal decision making and argumentation.
In addition hereto, it is often easier for a third party (due diligence provider) to find direct customer feedback and competitor insights whilst remaining below the radar.
The approach of CDD is a focused search for argumentation supporting (or undermining) the investment case. By means of a hypothesis-based methodology and existing sector experience it is possible to quickly deliver sound and quantitative presented findings through (financial) data analyses, expert interviews, research/press, customer feedback and interviews with key competitors.
Figure 3; Common Questions Asked in the Investment Decision Process
Source: De Strategie Compagnie
We believe rigorous Commercial Due Diligence is pivotal in determining if you should make a deal on the investment case at hand and if yes, for what price. Also, we believe the advantages of having due diligence performed by an independent advisory firm are significant.
ABOUT DE STRATEGIE COMPAGNIE
De Strategie Compagnie is a small scale, high-end consultancy firm based in Amsterdam, the Netherlands. Our team consists of highly experienced, top-tier (Big4) consultants. We distinguish ourselves primarily by our pragmatic, no-nonsense approach and high quality of service.
Commercial Due Diligence Experience
Our team proudly represents a solid experience in Commercial Due Diligence trajectories, with over 40 engagements performed. Focus lies predominantly on the mid-market in Western Europe. We have built specific and in-depth knowledge of various sectors, such as in Media and Telco (TMT), Healthcare, Retail, Aviation, Industrial/Manufacturing and Technology (ICT).
Other areas of experience
Strategy, Forecasting, Feasibility Studies, Market Entry Studies, Business Plan Reviews, Financial Modelling, Cost Reduction, Benchmarking, Business Acquisition, Acquisition Guidance.
We would be glad to assist you in your specific requirements and would welcome the opportunity to introduce ourselves and assist you with our services.
Drs./MsC Reinier Huisman, Managing Partner