Dud Diligence: an Acquisition Jack-in-the-Box

This posting is for the C-level executives out there who are doing (or thinking of doing) deals for their small or medium-sized businesses.  It is about helping you prevent form from overshadowing substance. It is about details.  PS: if details bore you permit me to humbly recommend your opting out of the deal business ASAP.

The Merger Verger has seen a boatload of due diligence checklists over the years and found almost all of them wanting, including some that were just pathetic.

Why?  Mostly because they are not written by people who run businesses; they are written by people who advise businesses.

Let’s be honest here: due diligence checklists are about the details, where God (or the devil) is.  A lawyer can make a fine checklist for matters relating to corporate formation or past board meetings and the like; an accountant likewise within his or her purview. 

These lists are fine with respect to ensuring that you get what you pay for.  But when it comes to understanding whether a product is approaching an inflection in its growth curve or whether the production manager knows the difference between a kaizen event and a tsunami, they usually ain’t worth squat.

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CEO Roundtable Blog » Post Acquisition Integration – A Checklist

The Merger Verger is not a big fan of “short and sweet” due diligence checklists but this one from Loren G. Carlson, of the CEO Roundtable, is well worth reviewing, particularly for those new to the topic.

CEO Roundtable Blog » Blog Archive » Post Acquisition Integration – A Checklist.

There are two reasons why I like this list:

  1. It reinforces the essential (and dual) role of due diligence, reminding us that while information is important in the process of buying a company it is absolutely essential in making that purchase succeed; and
  2. It lays out the sometimes non-obvious connection between legal due diligence and operations, citing examples of how “purely legal” stuff can affect directly the commercial elements of a deal and therefore its success or failure.

Carlson acknowledges that his article is to “get you started” but with that caveat in mind he does a nice job.  He also notes that the most successful acquirers were those that “invested in post-mortems after the deal” to learn from what went well and what didn’t. (Too important topic to cover here/now; more another time.)

Won’t Somebody Please Organize Due Diligence?

I have come to believe that one of the industries that is most in need of consolidation is the Due Diligence Checklist industry.  It makes me want to scream.
Listen, if you are creating a due diligence list for publication or broad consumption, unless your list covers the entire equatorial spectrum of possible topics in relatively equal depth, do not imply completeness.  Do not label your document something stupid like “Due Diligence Checklist.”   It’s a lie.  It suggests a level of breadth and thoroughness that is not there.  That is dangerous to people legitimately trying to practice the trade of deal making and acquisition integration.  Grrrr.  You are definitely pissing The Merger Verger off.
I recently read an article discussing due diligence for high technology companies, written by a Silicon Valley attorney.  The piece was 18 pages long, of which five were a “due diligence checklist” organized into six categories.


Now get this: the section entitled “Financial Condition” had four items listed (I didn’t even have to count them; they were numbered). That’s sure been my experience: round up four or so items of financial data and that part of your due diligence is …


Beer anyone?

Were that not bad enough, there was nothing – zero – on HR, nothing on corporate practices or culture, nothing on the sweeping Alpine vistas of corporate complexity.

Now, I have no problem whatsoever with a due diligence list that is focused on this aspect of a deal or that aspect. In fact, I think that’s the way it should be.  Just don’t call them more than what they are. It’s a small point; I get that.  But the implications are large.

We – deal makers, all of us, regardless of our specialties – need to be honest with ourselves.  No one of us is capable of producing an All Points due diligence checklist.  And no one should purport to do it.  This is too important a topic not to have our acts together.

Suggested Best Practice:

  1. Create the full sweep of legal, financial, operational, HR, and strategic due diligence procedures (including checklists) founded on specialized expertise from each area.
  2. Keep those procedures and lists organized separately to better enable dedicated teams to focus on the areas of their purview.
  3. When assembling a due diligence list focus on the specific area of your professional expertise and label it simply and honestly, e.g., “Due Diligence Checklist: Human Relations,” or “Legal and Organizational Due Diligence Checklist.”   To do otherwise is a prescription for confusion and incomplete analysis.
  4. In your company’s Integration Handbook, keep distinct due diligence checklists organized by specialty area.  Ensure that all areas are covered by separate lists.  Update those lists during and at the end of each transaction to codify new learning for the future.

I welcome other suggestions on how to manage the process of due diligence.  The effective obtaining and using of thorough corporate information in an acquisition is the absolute cornerstone on which a successful deal is built.  The stronger that cornerstone, the stronger the prospects for your deal’s success.

It is …




Is Big Riskier than Many?

The Wall Street Journal is reporting today that the flow of mega-mergers – deals over $1 billion – is at its lowest level in four years.  In board rooms across the country CEOs are shedding their bravado and doing smaller deals and bolt-ons and other things that can be more easily brought into the fold.  Risk is out.

But what really makes an acquisition risky?  Seems to me that from a practical perspective deals have two kinds of risk:

  • Investment risk → Assuming all goes according to plan, am I paying the right amount of money for this company?
  • Execution risk → Having paid the right amount, am I responding in a way that will enable me to achieve the intended objectives (and thus the returns)?

It is axiomatic that by reducing the amount of capital put at risk one reduces the overall investment risk.  (Even The Merger Verger can figure that out.)  But I can also figure out that smaller deal size generally means smaller upside potential. 

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Chick ‘n Roll-Up

Rolling up fragmented industries is an age-old strategy. Sometimes it works.  And sometimes better than others.

The Merger Verger was involved once in leading a series of roll-ups in the industrial packaging and crating space.  Chick Packaging (now a part of the Swedish global packaging concern, Nefab) began life in 18-something in rural New Hampshire and grew through acquisitions to be the largest industrial packaging company in the US.  While the strategy was highly successful, it never achieved one of the its fundamental underpinnings. 

The cornerstone business – and in fact most of the bolt-ons – had deep customer relationships with one or more of the Fortune 100.  The roll-up strategy called for leveraging those relationships into national contracts as the operational footprint of the company grew.  It didn’t happen, not to anywhere near the degree it seemed like it should have.

The reason offers a cautionary tale for anyone contemplating a consolidation strategy.

The Chick Map

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Chuck the Checklist? Check!

Being a lifelong Forgetful Guy, I have constructed little organizational systems to protect myself from myself.  One of those systems is checklists.  So I believe in them.  To a point.

When doing acquisitions, checklists are absolutely critical because there is so much information from so many different dimensions to manage.  So we have due diligence checklists (legal and financial, about which there are 487 things to say … another time) and integration process (strategic) checklists.

All successful acquirers build a “book” of know-how, constructed in part from lessons learned on previous deals.  Out of that process comes a thorough integration checklist, cataloging hundreds, sometimes thousands of items requiring attention.

In that setting – amidst thousands of boxes to check – how is it possible to keep your eye on the ball (by which I mean the larger strategic intent of the deal)?  Focused on rows and rows of line items, how can you possibly perceive “trajectory creep” or the surprise rocketing in from some unseen nebula somewhere?

The danger of checklists – and the more “thorough” they are the greater the danger – is that they become substitutes for thinking.

As an integration leader, I insist that my teams pause occasionally to chuck their check lists.  In those pauses I ask them questions designed to pull them from their pages to the big picture:

  • What are we missing here?  What are we not thinking of?
  • What could be different here from any of the other integrations we’ve done in the past?
  • How would or could we respond if [fill in all kinds of blanks here]?
  • What isn’t working so well?
  • What expected problem has not materialized (yet)?

and probably the most important of all:

  • Why did we do this deal in the first place and what else should we be doing or thinking about to make sure we accomplish that end?

Every now and again, chuck the checklist and think for yourself.


Manufacturing Due Diligence

The Deal magazine is currently running a moderately interesting article on things to look out for when doing due diligence at a manufacturing company.  The article doesn’t break a lot of new ground but it does offer some succinct points on things not to forget when looking at an industrial target.

Link here: http://www.thedeal.com/magazine/ID/044712/commentary/pe-and-manufacturing-deals-close-inspection-is-key.php