Due Diligence: An M&A Value Creation Approach (Wiley Finance)

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This nuts-and-bolts guide examines all aspects of an M&A due diligence--from coming to the decision to acquire a company, to who should be on the due diligence team, to the actual process and the final report and post-closing follow up. It advocates a focus on both risk mitigation and shareholder value creation, and emphasizes a holistic approach that spans from planning to post-acquisition integration. The tentative contents is: (1) Introduction; (2) Planning for value creation: growth strategy; (3) Engagement and pursuit; (4) Preparing for due diligence; (5) Validation of value: performing due diligence; (6) Assessment of due diligence results; (7) Optimizing value: post diligence negotiation; (8) Extracting value: post-transaction integration.

Due Diligence: An M&A Value Creation Approach (Wiley Finance) Review

William Gole and Paul Hilger outline an adaptive strategic assessment process that links a company's growth strategy to its investment objectives due to the M&A's mixed track record in creating value for the acquirer's shareholders. The company has to assess whether it is better to build, buy, or ally to accomplish these objectives.

To increase the probability of making a successful acquisition, the prospective acquirer has to clearly articulate why it intends to make an acquisition and how it proposes to generate a return.

This plan to create value has three sections:

1. Strategic purpose: A compelling reason to opt for an acquisition.
2. Value drivers: An examination of the magnitude and variability of the sources of value created by the acquisition, i.e., stand-alone value, acquisition premium, purchase price, synergy value, and combined value.
3. Key risks: Preliminary risk assessment and key issues of focus for the transaction considered.

Messrs. Gole and Hilger stress that the plan for creating value has to serve as the framework for purposeful behavior leading up, during, and following the close of the acquisition.

The due diligence team members of the prospective acquirer can make the best use of their finite resources if they conduct their work in a top-down, objectives-driven manner, where the objectives are informed by the plan mentioned above and their findings guide the prospective acquirer's negotiating posture and post-acquisition action plans. A fundamental purpose of the due diligence review is to validate or alter the key assumptions of this plan. This top-down, objectives-driven approach also encourages the members of the due diligence team to combine the risk-assessment mentality of an auditor with the value-creation mentality of an investor.

The authors note that the alternative compliance approach based on a checklist gives equal value to all aspects of discovery. The optimal result from this approach is to indicate that nothing emerged that would cause the due diligence team to recommend that the transaction not be pursued. However, a solid business is not necessarily a good investment.

Furthermore, this evaluative process gives the prospective acquirer not only a negotiating benchmark if it decides to proceed with an acquisition, but also a back-up plan with its next-best option if the transaction being pursued fails to materialize. This process remains useful, even in the presence of a prospective deal that comes to the potential acquirer at a time and in the form of the seller's choosing.

In the absence of this strategic assessment process, the acquiring company has only two options: Buy it or not. The absence of strategic grounding increases the probability of a decision-making process that is opportunistic in nature, undisciplined in its execution, and inconsistent with the company's strategic goals.

Messrs. Gole and Hilger remind their readers that a decision to continue discussions and proceed with the acquisition does not mean a clear path to closing. The nature of each due diligence finding dictates whether it is best addressed before or after the closing.

In addition, the authors emphasize that once the deal is close, the timely execution of the integration plan is key to creating shareholder value. This timely execution is only possible if the integration plan is complete and ready for implementation before the closing of the deal. Integration covers operations, synergies, and culture. The cross-functional integration team should be assembled as early as possible in the acquisition process to facilitate the rapid implementation of the integration plan.

Finally, Messrs. Gole and Hilger recommend that a contingency plan supplement the integration plan. This contingency plan contains strategies to mitigate, remediate, or monitor lower-probability, but higher-impact events.

In summary, the authors advocate an acquisition approach that is guided by a dual focus on the creation of value for the acquirer's shareholders and the mitigation of the transaction's various risks.

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