Often, when things go wrong, the writing was on the wall before the deal was inked. The acquirer just didn’t see the warning signs, or chose not to see them. Here are a few examples:
- The working capital of a mining services business blew out as it entered new markets: due diligence had identified a steady increase in working capital requirements over the preceding months, but it had been dismissed as a temporary ‘blip’.
- Demand for products or services dropped off dramatically after the transaction: due diligence identified the trend in the last two month’s results, but the data was never presented to the acquirer’s board.
- A roll up strategy didn’t deliver economies of scale and operational silos remained entrenched: due diligence identified significant cultural differences between business units which ultimately prevented effective merging of businesses.
While warning signs often appear obvious in hindsight, they can get lost as transactions take on their own momentum.
Human nature plays a role: we are predisposed to rationalise and explain away evidence that contradicts our beliefs. So, for example, when the deal sponsor (normally a senior executive) is presented with due diligence evidence that financial performance of a target is deteriorating, it is explained away as a normal fluctuation that does not change the deal thesis.
In contrast, successful transactions follow a disciplined process that involves appropriate consideration, review and management at every stage of the Transaction Lifecycle. The Transaction Lifecycle covers strategy, due diligence, assessment and refinement, negotiation, pre completion planning, deal execution and implementation.
Viewing the transaction process as a lifecycle is a useful tool for boards in particular to continually review, challenge and refine a proposed transaction in order to ensure that it is, and remains, in line with strategy and value accretive. Companies that successfully do this demonstrate a consistent track record in creating shareholder value.
This article is part one of the ‘Transaction lifecycle’ series.
Part two: Assessing the strategy – why transact?
Part three: Assessing synergies – when is a combined businesses more valuable than the sum of the parts?
Part four: Driving success (and minimising risk) of transactions with focussed due diligence
Part five: Assessing and refining the deal