MERGERS AND ACQUISITIONS THE ROLE AND NECESSITY OF NON- FINANCIAL DUE DILIGENCE FOR A CLEARER PICTURE

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BACKGROUND

Today we know from Professor Aswath  Damordian of Stern Business School in New York that 80% of Mergers and Acquisitions fail.

HBR and McKinsey endorse these statistics.

We also know from Price Waterhouse Coopers that 85% of change management initiatives fail and that this applies to integration initiatives undertaken after the acquisition/merger is completed.

One might think that with a 24% increase in mergers and acquisitions during 2018 and with more overall experience in the discipline that the results would be better than they are.

If anything the situation is getting progressively worse.

We know too ,from Miller Heimann one of the leading sales training companies in the world that organic growth, particularly with external salesforces is progressively worsening to the point where sales teams in 2012 would meet their  targets 63% of the time and by 2017 were only doing so 50% of the time.

Examination of website sales and call centres shows similar diminutions in effectiveness across all the regions of the world despite the use of technology, better training, CRM packages, pipeline management, time and attendance software and the use of NLP style hypnotic language patterns to improve strike rates.

WHAT IS HAPPENING TO ORGANIC GROWTH ?

Organic growth is slowing and conversion ratios are degrading and worsening because:

There is more buyer choice

Buying processes in many complex sales situations are becoming more complex and may well be spread across multiple jurisdictions completely removed from the salesperson’s home territory

Attention spans are shortening making it harder for salespeople to persuade anyone about the benefits of anything

There is more regulation of the sales process , adding cost and complexity to the process in more and more industries

 

WHAT IS HAPPENING TO MERGERS AND ACQUISITIONS?

 

Here the drivers of failure are different:

To begin with the M & A process is driven by accountants and lawyers and their technology and consultancy advisors in the Big 4 accountancy based management consultancy arms and their outriders : the systems integration houses.

Naturally they collectively focus on clever ways to value a company, negotiate the lowest possible price and identify, quite properly all the myriad of legal issues that buyers and sellers must be made aware of. Some of the risk of these transactions has been transferred to insurance providers who have created specialist products for just these purposes.

Shareholders and institutional investors are increasingly impatient for results so whilst these legal, financial and risk obviation processes work well enough , the non- financial elements are rushed or are overlooked.

Cultural differences are overlooked to the detriment of the favoured business model as happened with Walt Disney when it attempted to expand in Paris and had to be bailed out by the Kuwait Investment Fund

Regulations, particularly in North America where Sarbanes Oxley lays down particular requirements that must be fulfilled during the due diligence process. The regulations are harsh and demanding ,tending to elongate the acquisition process to the point where better heeled and nimbler competitors can engage in spoiling action or snatch the prize from under the buyer’s nose

50% of competitors to a given business did not exist before 2 years ago (Source: McKinsey’s) thus the rationale for an acquisition or merger may make perfect sense at the start but may not further into the process

Valuations are based on historical information which ignores trends in the economy ,tipping points, fluidity of demographics, fast following and competitor emulation , AI, OI etc. 

They fail to deal with matters such as brand toxicity caused by philandering or misbehaving directors or with salesforces seemingly performing well today but in reality on the move because a Sales Director or key people are about to jump ship or set up on their own.

Data is growing exponentially especially with 5G, so directors and key employees who are fit for purpose today may not be in the “Brave New World” created by the merger or acquisition.

Consequentially, the M & A either has to be phased to allow for better people to come in or restructuring and repositioning has to start before the intended M & A is in place, in order to be in “condition” and “fit for purpose” well in advance

A company may have divisions or elements best carved out or outsourced but without preparation they will not be in a saleable or outsourceable condition. Without that preparation and associated costs , the Merger or Acquisition will contain unrealisable value.

 

HOW TRANSACTION FOCUS CAN HELP

 

Transaction Focus is assembling technologies and teams of non-financial due diligence specialists who can pre-view or “look inside the engine” of an acquisition target . We call this TRUE DILIGENCE

www.truedil.com

We are looking to new ways of future proofing corporate investments, so that acquirers realise profitable, sustained ROI .

Transaction Focus has adopted a similar approach with Direct and Indirect Sales (including DDD-Distributor Due Diligence) for 15 years.

 

 

John Gelmini is an innovator who has conducted NFDD ((Non-Financial Due Diligence) for over 30 years, initially for GE Capital. He is Associate Partner at Transaction Focus and co-founder of TRUEDIL

https://www.transactionfocus.com/non-financial-due-diligence.htm

www.truedil.com