Strategic Due Diligence

Sometimes we see the process of acquisition become drawn-out through protracted negotiations, the unavailability of key people to be involved in dialogue, lack of available company data and a host of other factors. What does often get hurried though is the Due Diligence review which can often become a professional but single-point checklist of whether the financials "stack up". Of course the financial information must be verified and substantiate the representations of the vendor. That is really a given. But what else should be examined? When many people hear the term "Due Diligence" they think of purely accounting assessments but more and more the "sophisticated" buyers are placing great emphasis on strategic due diligence before reaching the decision to go ahead with an acquisition. What is meant by strategic due diligence? The starting point to answer this question is to go back to the objectives of due diligence; the acquirer wants to minimise their exposure to the problems and pitfalls that can occur when buying a business. The buyer should have determined before the acquisition process began the specific benefits it hopes to gain by buying the business.

It's all about the future

Traditional Due Diligence has its emphasis on understanding historical financial reports, uncovering potential legal liabilities and trying to identify unwanted surprises. So the focus is inevitably on the past instead of the future. This is not to say the detailed examination of historical data is not important, but alone it is not sufficient to ensure a transaction's longer term success. Strategic Due Diligence broadly refers to the assessment of what the combined companies' future success in the market will be. What is the likelihood of the new entity achieving acceptable levels of profitability next year, the year after and beyond that? What will need to be done after the merger to make the transaction a success? In our experience, successful acquirers understand the objectives of the acquisition in these terms and know how to review the operational factors that will have an impact during integration and on what success the merged business achieves. For Recruiting companies with straightforward distribution systems this may involve substantial assessments of staff capabilities, the 'culture' of the company that drives its performance, how client relationships are formed and maintained and what emphasis is placed on attracting candidates? Does the client-base and levels of position recruited for overlap substantially or do they add logical value to the existing recruitment services? Understanding the information gathered takes some experience and should not be delegated to junior staff because the management team is busy. We recently saw an excellent example with the CEO of one of our larger Recruitment company clients undertaking the Operational Due Diligence review in detail personally over a number of days.

Related: Developing Staff a Strategic Imperative to Equity Growth

Cultural Assessment in Due Diligence

Another major strategic consideration is the compatibility of the cultures of the two organisations. Two companies with drastically different cultural models will be very hard to integrate if at all. In such a people based industry if the cultures don't mesh then people leave, frequently taking with them many of the things that made the company appealing in the first place: relationships, contacts, their individual abilities and talents, their knowledge of systems and processes and so forth. Methods of measuring organisational culture are well documented. However, one tool that we have considered as an excellent model is the Goffee-Jones 2S Culture Grid*. This approach provides a two dimensional framework: sociability and solidarity which can have both a negative and a positive form. Goffee and Jones describe these two dimensions in this summary:

Solidarity

The degree to which people think together in the same ways, sharing tasks and mutual interests. The main driving force is logic. Positive solidarity gets the job done efficiently and effectively. Negative solidarity does not care for other people and can have high levels of internal conflict or inefficient self-interest.

Sociability

Sociability comes from mutual esteem and concern for ones colleagues. The main driving force in decisions is emotion and social concern. High sociability is people-based, low sociability has a greater task focus. Positive sociability is people helping one another to succeed. Negative sociability is covering up for other people and tolerating poor performance in the name of friendship or 'saving face'. They have combined these in a 2 S or Double-S Matrix that identifies four cultures, depending on high and low solidarity and sociability. At HHMC we have developed an assessment tool using Goffee and Jones' framework with other models to provide our clients a high – level snapshot of the cultural comparisons with the company they may be considering. No company goes into an acquisition, merger or sale lightly. So completing the most effective Due Diligence reviews makes sense. The "numbers" are important but so are the Operational Review and Cultural Assessment. Ten years ago this may have been seen as an optional extra but today it is essential!

Footnote: * "The Character of a Corporation", Authors: Rob Goffee and Gareth Jones, Publisher: Harper Collins Business, 1998