Merger, Acquisition, Integration & Due Diligence Maturity Assessment

The goal of most organizations is to grow. There are five fundamental ways to expand a business:

  1. Stick to your core, and create organic growth from within your existing organization
  2. Take away resources from lower growth potential initiatives
  3. Expand into a new geography or extend your product line to develop net new revenue streams
  4. Gain market share
  5. Create new markets where they didn’t previously exist

The first two items in this list are primarily within an organization’s control based on their strategic plan and ability to execute. Organic growth requires a strong commitment to creating a truly innovative culture. For most organizations, this aspiration is tough to achieve much less sustain. For these reasons, mergers and acquisitions are the most common ways to achieve items.

Many organizations have adopted Merger & Acquisition (M&A) as their default growth strategy. Most organizations seem to place significantly more rigor and energy into the identification of potential targets and establishing an exact valuation as part of the due diligence process. Speed is of the essence as the field of potential targets is narrowed, and competitors start to jockey for position to capture their prize. Our most successful clients have dedicated, full-time acquisition pursuit and integration teams. It is unrealistic to believe an executive that is responsible for running daily operations and hitting strategic goals can also handle an unlimited number of post-transactional integration tasks without some supplemental guidance and staffing assistance to keep the critical integration task on track.

Following a well-documented, disciplined approach throughout the Merger & Integration (M&I) lifecycle is the most effective way to achieve the value and strategic goals that likely served as the original business case to ‘green light’ the initial financial transaction. A 2011 Harvard Business Review report cited annual global acquisition spending in excess of $2 Trillion. Despite this tremendous amount of capital and corporate energy, in 2016, HBR went on to lament ‘M&A is a mug’s game: Typically, 70%- 90% of acquisitions are abysmal failures.’ Most acquisitions do not come even close to achieving their original projected financial and strategic goals. Risks associated with integration and achieving the desired competitive advantage need to be accurately captured and managed beyond the initial due diligence phase. An acquirer can improve its target’s competitiveness in four ways: by being a smarter provider of growth capital; by providing better managerial oversight; by transferring valuable skills; and by sharing useful skills. Determining the correct level of effort and potential risks associated with each of these integration risk categories can dramatically improve the chances of achieving the synergies and operating efficiencies typically sought once the transaction is closed.

As more business processes and capabilities are delivered via software and automation, new evaluation capabilities and skill sets must be brought to bear by pursuit teams. These teams increasingly need to be able to evaluate the value of significant deal components that frequently include Intellectual Property (IP) in the form of applications, artificial intelligence models, and other digital assets. Our recent experience has found that some Boards and C-Suite executives struggle to understand how to effectively value and evaluate some of these new categories of assets. Having led due diligence efforts at some of the largest publicly traded companies provides Risk Neutral with unique practical knowledge of how modern, risk-aware, digitally savvy due diligence teams operate. We have assisted and augmented pursuit teams to provide a more complete picture of what is being acquired and identified risks that might not have been immediately apparent.

The final element of this type of engagement is working with clients to manage the risks associated with staying compliant when they are actively acquiring or divesting properties. Most regulations provide a provision for a ‘honeymoon period’ following the execution of a transaction to allow both parties time to roll up their sleeves and put detailed plans in place to integrate or merge with the other organization. This is particularly challenging in more highly regulated industries or publicly traded companies where compliance with regulations such as Sarbanes Oxley (SOX), Health Insurance and Portability and Accountability Act (HIPAA), GDPR and Payment Card Industry Data Security Standards (PCI-DSS) that leave little room for error based on strict reporting, accountability, and data privacy requirements. By quickly evaluating the critical path integration project and establishing realistic completion guidelines, regulators and partners can be assured that business operations will remain streamlined and secure during the transition period.

Risk Neutral has frequently been asked to try to address these performance deltas. In almost every case, clients executive planned and executed effectively early phases of an acquisition transaction lifecycle, but severely underestimated the time and resources it took to complete the much more complicated and vital work of integrating and optimizing acquired properties that may last for go on for years. We work with our clients to improve their risk awareness and the maturity of their programs that support their Merger/Acquisition & Integration (MA&I) lifecycles.

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