The “Achilles Heel” in deal making due diligence

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Understanding why the expectations of so many deals are not realized

By Jerry Tarasofsky, CEO and Founder of CSI Diagnostics, CVCA Guest Author

Due diligence is essential in any investment/​acquisition/​merger deal undertaking with the clear objective of minimizing any risk of failure before the closing.

The processes are well known and quite sophisticated covering market place analysis, legal issues, past and recent financial performance, trademark and patent issues, regulatory, environmental, as well as cyber and data security issues. Within many accounting and legal firms, specialists exist to analyze all of these and offer opinions on any risks and issues pertaining to them.

So why is it that even with all of that knowledge and professional scrutiny, the expectations of so many deals are still not realized after they close?

It’s the Achilles Heel” – knowing what is actually going on within the operational performance of the targeted company related to its operations, customer dealings, innovation capacity, adaptability to change, and its culture.

Five key strategic Achilles Heel operational performance areas crucial to consider:

1.) Operations Effectiveness
Yes, they are shipping products daily, and mostly on time.

But are they the lowest cost provider within their industry? How about the quality of their products and services in relation to market expectations? How efficient are their operations?

Without getting inside of the company, how can we assess those aspects that can have a significant impact on a successful deal?

2.) Customer Satisfaction
Yes, we interviewed some of their major customers and they seem happy with the company.

But did you know how they rated those capabilities of the target company that they may not have been so happy with, and makes them vulnerable to a competitor?

And yes, those we interviewed represent 60/70/80% of their sales.

But did you realize that if any one or two move to a competitor the huge impact it can have on the business? And did you learn how those customers that comprise the other 40/30/20% rate those capabilities which may well represent the future growth of the company?

Not listening to a large segment of its customers and how they perceive those capabilities that are important to them can have a significant impact on post-deal success.

3.) Innovation
Yes, they have one or two leading products in the market place and are considered a leader.

But do you know how active they are in understanding the market place shifts to avoid the current dilemma facing traditional retailers, as one example of not knowing or waiting too long?

And how well they motivate internal innovation that can have a significant impact on the business success? And how well the organization is able to develop and deliver new offerings to both satisfy its current customers and attract new ones?

Without a full understanding of its capacity to innovate, the long-term anticipated benefit of a deal can be jeopardized.

4.) Agility/​Adaptability
Yes, they have been in business 35 years and have been growing steadily.

But do you know if they have a formal ongoing strategy review process? Or how scalable is the technology that they have? Or are they an organization that can swiftly be re-organized to deal with a necessary change in direction?

Market changes/​shifts and innovation are rapidly impacting nearly every industry and an organization’s ability to change can be crucial.

5.) Culture
Yes, their staff turnover rate is low, and top management has been stable for the last few years.

But how engaged are the various levels of the staff with the company’s evolvement, not only at head office, but within all of its geographical locations? And what does the company do to increase the competences of its work force to constantly improve their skills and ability to take on more responsibilities?

And are they paying lip service to working together as a team, or actually collaborating with each other to help attain objectives? And how effective has the leadership been in aligning its supply chain and its human capital with the needs and requirements of its customers?

Culture is one of the biggest obstacles faced in post-deal success often impacting a lot of people and requiring considerable and costly changes.

The Achilles Heel in creating successful post deals is not having insights on some or all of the five key strategic operational performance areas above. The value of such insights cannot be underestimated in both reducing the risk for an investment, but also to help in the integration and success of the post deal phase.

In a recent research study on 540 public companies by PwC, they found that deals that were based on understanding an organization’s capabilities delivered a 14 per cent higher shareholder return than by using any other approach.

The barrier to gathering the capabilities of an organization related to the five operational performance areas often is the time it takes and the costs and disruption involved. But thanks to business diagnostics that are now available, this information can now be gathered, giving the missing insights in due diligence risk reduction and business growth, in a timely and low cost manner.