Taking Management’s Hypotheses With a Grain of Salt
Management presentations, among other things, a treasure-trove of data and insights into the commercial potential and promise of an acquisition target. Built on years or maybe decades of the management team’s experience and their good faith assumptions about the value they can deliver post-acquisition. But not always.
For example, sometimes. Perhaps many times, the commercial assumptions built into management presentations are little more than an extrapolated view of historical performance, massaged with some qualitative tib-bits picked up at the most recent tradeshow. Hardly what a senior executive who cares about his or her career and with a fiduciary responsibility to their shareholders should hinge core components of their valuation model on.
The potential damage from a poorly assessed and valued acquisition can be severe. Resulting in the potential for tremendous loss in shareholder value and the ouster of key members of the management team and board of directors. That’s why the most successful M&A shops conduct robust due diligence on acquisition targets. Focusing on five key areas:
The potential damage from a poorly assessed and valued acquisition can be severe. The best performing companies typically have a trusted, quickly activated stable of accountants, lawyers and consultants ready to provide support.
• Commercial: How well positioned is the target and how strong is the strategic fit with the acquirer?
• Operations: Whether the company maintains operational integrity across its fixed assets and production capacity, including a review of operational risk on commercial activity (e.g., COGS)
• Financial: How well the company has done to-date and how it’s forecasted to do in the future?
• Human Resources: What are the quality, strength and risks inherent in the management team?
• Legal / Intellectual Property: Are the target’s most important assets its own and is it subject to any IP or alternative forms of litigation?
That level of on-going assessment requires much more skill and capacity than internal M&A shops typically house. That’s why the best performing ones typically have a trusted, quickly activated stable of accountants, lawyers and consultants ready to provide support. Outside counsel that can help reduce “deal fever” and, ultimately decision-making risk, by adding a much-needed dose of objectivity to what should not be but often is a highly emotional process.
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