Uncovering black holes and hidden value
While there are significant financial and strategic benefits in an acquisition, it also brings substantial risks that need to be systematically identified and properly managed. Too often, acquirers may become overly enthusiastic in, or feel pressured into, closing a deal and end up glossing over potential pitfalls and giving in to too many negotiation points. Global merger statistics reveal that more than 60% of M&A destroy value for the acquirers. Some of these could have been avoided with effective pre-acquisition due diligence.
“Black holes” in the form of undisclosed risks, hidden liabilities or onerous commitments are latent in most acquisitions. Acquirers may also over-estimate synergies, base deals on unrealistic growth target and persist with acquisitions despite negative or incomplete information. Due diligence can be used to identify deal breakers, better analyse financial and operational health, set negotiation parameters, challenge synergy and valuation assumptions, and assess risks.
In addition to flagging up downside risks to a deal, an effective due diligence should also uncover potential upside that can be exploited, e.g. operational improvements, cost savings, revenue maximisation, turnaround/restructuring/synergistic opportunities, capital optimisation and better asset utilisation. Thus, a properly executed pre-acquisition due diligence enhances a deal by uncovering hidden values and other reasons that may inspire the potential acquirer to pursue a deal more aggressively.
Although a straightforward exercise, too many acquirers (and even due diligence accountants) see due diligence as just an audit exercise and end up missing the real value of a deal.
|What do we look out for during due diligence?