Analysis: The Merger Verger recently conducted a Google search on “due diligence.” In approximately one half a second, 36 million results popped up. We took a quick look at all of them and found that of those relating to M&A 98.7% deal with legal and financial due diligence. Digging a bit further we found that of M&A results 93.4% offer the same information within one standard deviation.
Conclusion: even The Pinball Wizard could conduct a tolerable-good due diligence investigation into the legal or financial aspects of an acquisition.
Tommy can you see me?
But strategic and operational due diligence … well, that’s another matter altogether.
For less experienced acquirers, The Merger Verger worries that they may make inquiries about what due diligence to do only to be told not to worry about it, their lawyers and bankers and accountants have it all under control. “Okay, good,” they might reasonably say.
Unfortunately, that sad little exchange explains why so many deals fail … because legal and financial due diligence do not – as a rule – probe the strategic and operational issues that are the foundation of (1) making a sensible deal and (2) making it actually work.
It is one thing, for example, to know how a sales force is structured and how they are compensated and even which salespeople are the most productive but it is another thing altogether to know how the sales people sell and how they interact with the product design people or if the selling process requires a deep solutions orientation or merely efficient order taking. It’s all different.
Your lawyers and accountants can ask all the “what” and “who” and “where” questions in the world about your acquisition target but if your operations people don’t ask the “how” questions your deal is doomed. (The point here is not to besmirch lawyers or accountants but to face the fact that this kind of due diligence is outside their normal scope of work.)
Strategic and operational due diligence provide the information upon which a successfully closed deal becomes a successfully done deal.
It begins with understanding how you, the buyer, function and then asking the questions you need to know to understand how to make you and the seller function together. If you don’t have the time to develop the “how” questions, probe the answers and enact the solutions yourself, get help. You will tilt the otherwise very long odds in your favor. The Merger Verger guarantees it.
About the Art: The original album cover from The Who’s rock opera Tommy and a detail of a 1951 Genco Tri-Score woodrail pinball machine (courtesy of Mystic Pinball, www.mysticpinball.ca)
Afterword: it’s probably not that great an idea to quote any of the statistics cited in the opening paragraph of this posting. We made them all up. “Illustrative fiction” from TMV!