Download - Pre-Deal M&A White Paper November 2014
A White Paper
By Rahul Nag, Partner, Octavia Life Ltd
November 2014 © Octavia Life Ltd
The Elements of Pre-Deal M&A Work
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Contents
Purpose of This Document ..................................................................................................................... 3
The M&A Problem .............................................................................................................................. 3
The Question ....................................................................................................................................... 3
The Solution ........................................................................................................................................ 3
Executive Summary ................................................................................................................................ 5
M&A Strategy ......................................................................................................................................... 7
What is your M&A Strategy? .............................................................................................................. 7
Definition of an M&A Strategy ........................................................................................................... 7
Benefits of a Clearly Defined M&A Strategy ....................................................................................... 7
What Does an M&A Strategy Look Like? ............................................................................................ 7
Developing Alternatives to an M&A Strategy ..................................................................................... 8
The Steps to Developing an M&A Strategy......................................................................................... 9
M&A Framework .................................................................................................................................. 10
Definition of an M&A Framework .................................................................................................... 10
Benefits of Clearly Defining an M&A Framework ............................................................................. 10
What Does an M&A Framework look like? ....................................................................................... 10
The Steps to Developing an M&A Framework.................................................................................. 12
Key Elements to Consider ................................................................................................................. 13
Acquisition Screening ........................................................................................................................... 14
Definition of Acquisition Screening .................................................................................................. 14
What Does an Acquisition Screening Process Look Like? ................................................................. 14
Benefits of Conducting Acquisition Screening .................................................................................. 15
The Steps to Developing an Acquisition Screening Process ............................................................. 15
Conducting a Negative Screen .......................................................................................................... 16
Commercial Due Diligence .................................................................................................................... 17
Definition of Commercial Due Diligence ........................................................................................... 17
Commercial Due Diligence and Financial Due Diligence .................................................................. 17
Benefits of Conducting Commercial Due Diligence .......................................................................... 17
The Three Main Elements of Commercial Due Diligence ................................................................. 18
Market Analysis ............................................................................................................................ 18
Competitive Analysis..................................................................................................................... 18
Customer Analysis ............................................................................................................................. 19
Summary ............................................................................................................................................... 20
About Octavia Life Ltd .......................................................................................................................... 21
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Purpose of This Document
The M&A Problem
According to a major Harvard Business Review (HBR) article, over half of the 250 major corporations
across a variety of industries surveyed and which rely on M&A activity to grow their business, did
not have an accurate acquisitions strategy developed – i.e., clear, logical thinking which justifies each
and every acquisition opportunity they either follow through to completion or which they reject
along the way.
The HBR article on ‘Writing a credible investment thesis’ stated that more than 40% of the 250
senior executives surveyed across industries reported that they had no investment thesis
whatsoever – (here defined as “a sound reason for buying a company”) and of the 29% that did have
one, half discovered that within three years of closing the deal that their thesis was wrong.
Additionally, within the same organisation there can often be multiple viewpoints as to which
acquisitions need to be conducted and why. This ultimately leads to confusion and sub-par
performance and financial results from conducted acquisitions. According to another Harvard
Business Review article (“The Big Idea: The New M&A Playbook”), more than $2 trillion is spent on
acquisitions each year with a failure rate between 70% and 90% according to numerous studies.
The Question
So, with this much failure and sub-par M&A performance in mind, how can M&A professionals
ensure that the entities they target for acquisition are likely to lead to the highest level of post-
merger success?
How can they ensure that they have developed clear, logical thinking behind their acquisition
strategy, and that this then integrates with their overall corporate strategy and that they do not miss
out on any potentially high value-adding acquisitions?
The Solution
Every organisation therefore needs to develop a clearly thought through M&A Strategy which will:
Create an end-to-end M&A Strategy clearly following the overall corporate strategy which
will demonstrate how the acquisition is likely to add value to the combined business
Develop an M&A Framework to identify the key criteria against which all potential
acquisitions will be evaluated
o Developing this will engage all stakeholders affected by the merger, thereby creating
the greatest chance for success by highlighting potential issues at an early stage
Provide a specific Acquisition Screening process to identify and pre-screen a short-list of
potential target opportunities
Establish a comprehensive analysis process to determine whether to invest in the short-
listed firms
This document, developed by an organisation with 15 years of experience in Pre-Deal M&A
Consulting, highlights the four principle elements of Pre-Deal M&A Work and how to execute each
step.
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This will then bring your organisation closer to the concept of the Harvard Business Review article’s
Investment Thesis which is defined as being “no more or less than a definitive statement, based on a
clear understanding of how money is made in your business, that outlines how adding this particular
business to your portfolio will make your company more valuable.”
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Executive Summary
Pre-Deal M&A Strategy Work aims to identify, target and accurately assess potential acquisitions
based on a four step-process which logically follows your given corporate or divisional strategy. This
White Paper aims to outline the different steps and approaches to conduct this analysis.
The aim is to provide clear, logical reasoning as to why specific entities have been selected or
rejected as potential acquisition targets. It also allows you to develop a comprehensive and
thorough approach to ensuring no targets are missed. The four steps can inter-lap and also be
reviewed and added to on an on-going basis.
Pre-deal M&A activity comprises of the following four elements: M&A Strategy, M&A Framework,
Acquisition Screening and Investment Due Diligence:
M&A
Strategy
M&A
Framework
Acquisition
Screening
Investment
Due
Diligence
Corporate
Strategy
The M&A Strategy requires you to understand what your Overall Corporate, Business Unit/Division,
Regional or other relevant strategies which you need to be referencing for every acquisition you
conduct are. Part of this may require specific deliverables (e.g., a 20% increase in revenues in Asia),
whilst others may be more general (e.g., access to leading patented technologies). One key element
of M&A Strategy is the providing of evidence for when acquisitions are not appropriate.
The M&A Framework is an analytical tool for judging the suitability of specific markets, regions and
companies in meeting the M&A Strategy. This identifies the key criteria against which you will assess
every acquisition. This element could involve considerable internal dialogue with various divisions
and departments in your organisation.
Acquisition Screening is the comprehensive process for building the widest possible pool of
acquisition targets and then eliminating unsuitable candidates using the M&A Framework previously
developed. This is an on-going process which can also tie into your firm’s competitive intelligence
capability.
Investment or Commercial Due Diligence is the detailed examination of a potential acquisition. It
studies the target customer, market and competitive environment to assess the accuracy of the
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management’s sales forecasts to help determine the appropriateness of doing the deal.
Management and Cultural Due Diligence can also be a part of this.
The Pre-Deal M&A Work can then be fed into both Post-Merger Integration as well as be used as a
perpetual benchmarking tool to compare with the end results of each merger to what was expected
before the deal was done. Any differences can be fed back into the process thereby leading to an
ever-improving end-to-end M&A process to increase the value of acquisitions to your organization
whilst minimizing the risk of failure.
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M&A Strategy
What is your M&A Strategy?
Can you express it in one or two sentences?
Or is your approach more along the lines of – “Let’s see what is out there and we’ll take it from
there?”
Many companies do not have a coherent and clear Mergers & Acquisitions Strategy. Which includes
questions such as what the purpose of their M&A activity is, why they are doing it and what results
they are hoping to achieve over the short, medium and long term.
This means that it is very difficult to understand why one deal might be better than another. It also
makes it difficult to argue with the rationale for accepting and rejecting potential acquisitions in a
clear and consistent manner.
Definition of an M&A Strategy
An M&A Strategy is simply the requirements you have of any potential acquisition. It is a way of
quickly filtering out which acquisitions are likely to add value to your organisation.
They can contain tangible or intangible elements, or even a combination of both. (e.g., Every
acquisition must take us into new related markets and provide $100m of profit each quarter. Or we
are only focused on acquisitions in the next two to three years which will enhance our brand
amongst doctors in Japan.)
It is a viewpoint from which to be able to quickly understand whether a target is a ‘good fit’ or not. It
is a way of stepping back and answering the question of “Do we need to be doing this deal?” at a
high level.
Benefits of a Clearly Defined M&A Strategy
Allows for a clear path from corporate strategy through to acquisition with logical reasoning
behind every accepted and rejected target
Provides clear guidance and reasoning to all parties who will be affected by M&A activity
within the firm
Potential reduction in risk of unsuccessful mergers
Focuses all further M&A work by determining the markets, regions and types of firms to be
investigated
Allows for consistency of approach to M&A activity regardless of personnel changes
Provides a structure and basis from which to make changes as market conditions change
What Does an M&A Strategy Look Like?
Ideally, you want a short paragraph or perhaps a one page M&A Strategy Briefing Document you can
then share with key personnel across your organisation. So it must be something very clear and easy
to follow at all levels of your organisation. It will usually contain the following elements:
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1. It follows the company or corporate strategy
a. This can be the overall parent company’s strategy, or specific parts of this, like the
company’s growth strategy. Alternatively, there could be different M&A strategies in
place according to the business unit or region you are involved with
b. By clearly following this corporate strategy, the M&A Strategy then exists to support
the organisation and thereby make any mergers more likely to succeed
c. This will also tie the M&A work you do to the core competencies and mission/values
of your company
2. It clearly states why and in what circumstances your company will do a deal
a. How the merger will create value and leverage the strengths of the organization or
counteract its weaknesses
b. It clearly provides guidance and evidence when M&A activity is not suitable
3. Stresses clearly the deliverables or end-results required
a. This can be specifics such as the additional revenues, product lines, profitability or
functionality which will be added as a direct result of the proposed mergers
4. It works clearly with the M&A Framework (see next section)
5. Developing an M&A Strategy needs to involve all relevant parts of your organization
a. An initial M&A Strategy can be developed by the Director of M&A and Strategy.
However, this document needs to involve all parties which will be affected by any
merger
i. This includes Senior Leadership from the Board to the CEO
ii. Logistics, Finance, Marketing, HR, Operations, Regional and Divisional
Business Units, etc.
b. By involving all relevant parties upfront and creating workshops or regular
communications, you engage and empower these parties, help speed up post-
merger integration, and potentially access the different departments’ insights and
contacts
c. This process will also ensure that you are accurate in meeting the corporate or
divisional strategy outlined above
Developing Alternatives to an M&A Strategy
Paradoxically, you will also need to be able to be clear when an M&A Strategy is not appropriate.
This could be where you believe none of the identified targets will add sufficient value and therefore
other options are needed (e.g., joint ventures, strategic alliances or even pure organic growth).
By having a clear M&A Strategy and Framework, this will make it easier to decide when this is the
case. Also, it will give more confidence to internal parties about your judgement that you are not just
looking for or setting up ‘deals for deals’ sakes.’
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The Steps to Developing an M&A Strategy
These go alongside developing the M&A Framework.
1. Come up with the first draft using the formally defined corporate and relevant divisional and
regional strategies
2. Identify the key individuals and groups within your organization who would be interested in
and affected by M&A activity
a. Interview each person to get their inputs and requirements. This will also be
required to develop the M&A Framework
b. Eventually discuss your draft M&A Strategy with them and collect any feedback
3. Incorporate changes or additions to the M&A Strategy based on these discussions
4. Share this final M&A Strategy across the organisation and with relevant external partners
(e.g., service providers to help them focus in their specific tasks)
5. Charge relevant parties with the next stage of the work in following the M&A Strategy (e.g.,
defining the M&A Framework)
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M&A Framework
Definition of an M&A Framework
An M&A Framework is a list of criteria against which acquisition opportunities will be assessed. Your
organisation might have multiple M&A Frameworks for different business units, divisions, regions,
etc.
Benefits of Clearly Defining an M&A Framework
Developing and testing a robust M&A Framework can mean a major investment in time and energy.
It requires significant analytical thinking time alongside multiple interactions with key personnel
across your company to gather their input. So what are the reasons for conducting this work?
Allows you to clearly align and organize your thinking, and it lets you interlink with the M&A
Strategy
Clearly shows your logic in why you are rejecting or pushing for a deal
o This could be needed to communicate with the Board or Senior Figures in the
company who may be for or against a deal
o Additionally, allows communication with other personnel and explains why you are
rejecting their ‘favourites’
Allows for a clear vision and buy-in across the organisation
o Because the whole company has been involved in developing the M&A Framework,
you are likely to encounter less resistance during the pre-deal state and post-deal
integration of any given merger
When negotiating or working with potential owners and management, you can explain
clearly why the merger makes sense for both parties; showing a clear framework will give
them confidence you have thought things through and will protect their hard work
The tool can be developed and replicated across the organization to allow other teams to
adapt this to their own requirements (e.g., functions in different regions)
What Does an M&A Framework Look Like?
The aim is to create a structure (e.g., in a spreadsheet or other software with the specific criteria for
assessing the acquisition). The output can be developed and tailored according to your own needs,
but the aim is always a very simple and easy-to-understand rating or ranking system for the
suitability of an acquisition. (e.g., a number scale from 1 to 100 where 100 is the strongest or most
suitable acquisition target with 1 being the least suitable acquisition target.)
Alternatively, the Framework could produce more of a qualitative output (e.g., a detailed briefing
document for each target with a ‘case’ made for and against the acquisition). Alternatively, some
combination of these options can be used. The output will depend upon the individuals and groups
accessing the material, their requirements from it, and the presentation style best suited to reach
them.
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M&A Frameworks can follow a three step process:
Type of Framework Explanation Rationale
Regional M&A Frameworks
To identify which are the best geographic regions and countries to invest in
In order to focus the short and medium term M&A investments on those regions likely to produce the best outcome for your organisation
Individual Market Frameworks
A Framework can be developed to identify opportunities within each market and niche you are currently operating in or want to enter
The requirements you have and the conditions of each market you are or want to be involved in could differ significantly thereby requiring separate M&A Frameworks
Target Specific Framework Analysis
Once you have identified the region and market/niche, you can use a Framework to assess potential opportunities
You may need a much more granular level of detail for the companies themselves (e.g., turnover and profitability requirements, etc.)
The Steps to Developing an M&A Framework
These steps are very similar to that of developing the M&A Strategy.
What results are you looking to get from each M&A transaction? What are the key outputs or end
results needed? (e.g., increase in revenues, increasing geographic reach, allowing entry into new
markets, etc.)
From this M&A Strategy, you can isolate some of the key criteria you therefore will need to meet
your M&A Strategy requirements. This will vary by division and business unit. It can include many
different things, including elements from sales and marketing, logistics, corporate social
responsibility, research & development, operations, IT, human resources, channel, etc.
1. You will start by pulling together a list of all potential criteria, giving a brief explanation of
each one, the category it belongs to, and what is required. (e.g., Category – distribution
structure of target, criteria - Must have nationwide distribution amongst major supermarket
chains. Or brand must be No.1 or No.2 in each segment under the sales & marketing
category.)
2. Then rate each one’s importance between 1 and 100; 100 is the most important, 1 is the
least (or use a 1-10 scale).
3. From these, take the items which are the top 10-20 and further refine the requirements.
a. It is critical to identify which items are ‘must haves’ or ‘deal breakers’ if they are
missing versus which ones are ‘nice to have,’ etc.
4. Take these to each of the key people in the organisation and get them to rate this. Plus,
adapt according to their feedback and adjust as required.
5. Set up a structure in the relevant software package (e.g., Microsoft Excel for example) and
provide both user entry forms and some kind of dashboard or results template:
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a. So, take an example acquisition, perhaps a previous or current one your company
did, and put in scores for each of these key items to come to a score out of 100.
b. Ideally you are looking to come to a score or some kind of ranking on a scale which
will allow you to give a very high-level rating of all potential acquisition targets.
c. This can then be the start of discussions and negotiations within the company and
externally, and it can also be a way of comparing and coming to a conclusion about
which opportunities to pursue and which to discard.
Key Elements to Consider
Obviously there will be some subjective reasoning needed, so integrating company-wide input into
the process will help ensure key criteria elements are comprehensive and weighted accurately into
every acquisition.
The ultimate aim is to provide a ‘logic and evidence trail’ to be shared and discussed across the
company and develop a consistent companywide approach to M&A activity so it can be used both in
the future as well as be fed into the post-merger acquisition process.
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Acquisition Screening
Definition of Acquisition Screening
Acquisition Screening is a systematic and structured process for assessing which companies,
divisions and business units exist in a given marketplace and then conducting analysis to eliminate
unviable opportunities, leading to a short-list of potential acquisition opportunities to take to a more
detailed analysis stage.
The aim is essentially to find out ‘what is out there’ and then ‘cut or separate the wheat from the
chaff.’ (i.e., From all the potential organisations you could acquire or work with within your market,
which ones are likely to add the highest value to your organisation? And can you articulate why and
how that is? Or is likely to be?) That in a nutshell is Acquisition Screening.
What Does an Acquisition Screening Process Look Like?
This process works in a Funnel Method.
For example, if you are looking at a large global market, with numerous players involved, you could
start with 100 companies in your list which is then narrowed down to three or four strong
candidates for acquisition.
Additionally, you could have multiple lists (e.g., one Acquisition Screening list for specific
technologies your organisation is interested in acquiring). The companies you are looking at might
not even be making any revenue. At the same time, you might be interested in expanding your
service network in Asia, in which case you would be interested in potentially large companies that
are fully functional with thousands of engineers in service with high margins. You would need two
different processes for each. There is no one-size fits all.
Acquisition Screening is strongly linked with Competitive Analysis and is something on-going rather
than a one-off process. (e.g., A division owned by a multi-national company may seem off-limits
today, but a new CEO at the target company’s corporate level may lead to a sell-off in the future and
therefore an acquisition opportunity for you.)
By keeping consistent track of that company, you will be well aware of opportunities and will also be
potentially able to move in at a later stage.
Broad Range of Companies within a
target market or geography
Narrow Range of Companies within a
target market or geography
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Benefits of Conducting Acquisition Screening
1. By conducting a formal Acquisition Screening process, you make the work comprehensive
and avoid missing any potential opportunities
2. You can also develop a database of companies and keep track of them as their performance
changes
3. This will also help with recruitment and talent acquisition as you can potentially be alerted
of relevant individuals and teams to join your organisation at a later stage
4. Helps to avoid analysis based on familiarity or other biases (e.g., because you know a
company, or have people in your firm who worked there, you may unconsciously put
emphasis on those companies rather than the ones which offer real strategic value but are
unfamiliar to you)
5. You can share the process and the situation with individuals and teams within your
organisation to keep them informed and also gain their insight and suggestions
a. They can also be alerted early on in the process so they can register any specific
deal-breaker issues upfront to save you a lot of wasted time
b. And also to prepare and let you know their post-merger integration requirements to
speed up the integration of the deals
6. By having a formal process, you can also be alerted to specific non-commercial issues which
need to be investigated with particular acquisitions (e.g., cultural issues, regulatory issues,
etc.)
The Steps to Developing an Acquisition Screening Process
1. Use your already developed M&A Strategy and M&A Framework to define both the scope of
your initial acquisition search (i.e., your pool) (e.g., are you only looking for targets in Japan
or for all global OEMs in the medical robotics sector?).
2. Start by building a structure or framework for storing and analysing the data. This could be
an Excel spreadsheet, an Access database or even something on the cloud, accessible to all
in the organisation.
3. You will also need to assign someone to ‘own’ and manage the database and bring in either
internal or external resources to work on this on an initial and/or an on-going basis.
a. You will also need to define the timings - when will the first piece of work be done,
who will this work be shown to, etc. You can work backwards from this.
4. Define your Acquisition Screening strategy process. What are the criteria you will use to
allow for one company to get into the funnel in the first place, and then how many stages
will there be to reduce the funnel to a shortlist? What are the criteria to reduce each
company level by level? This is where the M&A Framework comes in, as you could either use
this or some element of this in defining the Acquisition Screening criteria.
a. As with the M&A Framework, it is key to start with identifying what the key facts you
need to collect are. The aim is to do the minimum with the ‘long list’ before you
collect more information as many of these companies you might be able to
eliminate later.
5. Then start the process and get the database filled in with all the organisations in the selected
market/niche/region and then do the analysis one company at a time.
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a. To do this, you will use industry information sources such as association lists, trade
press publications and more. You can also enlist members of your company who
know about specific markets and geographies once you have built your list.
6. Share these results within the organization to get feedback and see if there are any errors in
the process, things being missed, etc.
7. Keep doing this process until you come up with your initial shortlist to take to the next stage
(i.e., Commercial or Investment Due Diligence).
As ever, the key is to develop a ‘logic’ trail and put all your reasoning and evidence for everything
you have done in one company-wide accessible location. This is so that if the CEO asks you why you
did not consider Company X, you have all the evidence there (e.g., their sales were not high enough,
they didn’t have proprietary technology or key personnel, etc.).
Conducting a Negative Screen
One thing few companies do as part of Acquisition Screening is a Negative Screen. This is only really
to be done when you have gotten down to the bottom of your funnel. So let’s say you have three or
four targets in each category. You have built the case for acquiring the company using the M&A
Framework.
You then need to do the opposite – what are the likely risks or the disadvantages of doing the deal?
You will be able to explore this in more detail during the Commercial Due Diligence phase, but doing
this work beforehand can save time and money as well as provide some of the focus and the
questions to ask during the Due Diligence work phase.
If you don’t do this, it is like having a court case where only the prosecution makes their case (i.e.,
why to do the deal and then the board or CEO, acting as the judge for the sake of this example,
makes their decision without hearing the defence or the reasons against).
Now, to build the Negative Case or Case Against, you can put together a negative M&A Framework
(e.g., building a simple framework of things which are deal killers, like tax issues, fraud, etc.). Some
of these items will be covered automatically in the M&A Framework or you might want to integrate
them into the M&A Framework explicitly. Alternatively, these could be developed on a case by case
basis and could be risks for each company.
You could put a different individual or team in charge of the positive and negative screen for
example.
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Commercial Due Diligence
Definition of Commercial Due Diligence
Here is a definition of Due Diligence translated from the German language book ‘Commercial Due
Diligence’ by Dr. Ralph Niederdrenk and Matthias Mueller published in January 2012 by Wiley VCH
Verlag:
“Commercial Due Diligence or CDD is the thorough examination of the target company’s market,
customer and competitive environments in the scope of purchase of the company or division in
question and working in close contact with the financial due diligence process. The ultimate aim of
CDD is to quantitatively validate the business plan of the target company and its sales forecasts.“
Commercial Due Diligence (CDD) is conducted when the Acquisition Screening process has resulted
in a short-list of targets, on which more detailed analysis will be conducted with the aim of a
potential acquisition. CDD can be done either before or during the approach to the negotiations to
purchase a company.
The ultimate aim is to allow the acquirers to make an informed decision about whether to do the
deal or not by validating the business plan and forecasts of the management of the target company
and thereby understanding whether an acquisition will create sufficient value to the parent company
at the provisional price.
Commercial Due Diligence and Financial Due Diligence
The Commercial Due Diligence and Financial Due Diligence providers must work closely together.
Financial Due Diligence according to the PWC UK website involves “analysing and validating the
entire financial, commercial, operational and strategic assumptions being made. It uses past trading
experience to form a view of the future and confirms that there are no ‘black holes.’”
Financial Due Diligence therefore needs CDD in order to capture the future prospects of the target
company’s sales and assumptions about the market and likely future demand. This can then be fed
into future sales and cash flow prospects. Otherwise, the FDD could be simply projecting the past
into the future. This is of course not to downplay the critical role that FDD plays in any transaction.
But the past does not necessarily equal the future as many investors are aware.
Benefits of Conducting Commercial Due Diligence
Identifies and highlights key risks in the market and competitive environment which prevent
the deal from meeting the M&A Strategy
Provides a clear understanding and granular detail of each market segment in which the
target market operates, to allow you to really understand whether to proceed
Allows for validation of the management’s sales forecasts, so as to more accurately predict
future sales and growth and assess the quality of management’s market understanding
Understanding the likely revenue and profitability levels under different market conditions
(e.g., if the market grows above or below management expectations)
Results will aid in the Financial Due Diligence and in valuing the company more accurately
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Understanding the target company’s business model to learn how it can be best integrated
into your company operations
The Three Main Elements of Commercial Due Diligence
Market Analysis
The basics of this stream of work is to understand the dynamics of the various markets in which the
target operates.
The initial work is in clearly and accurately defining the relevant markets in which the target
company operates. This can be analysed in different formats, including:
Regional Focus - e.g., England v Scotland v Wales, etc.
Specific Service Offered - e.g., Training provision, training management, etc.
End Customer Industry - e.g., Retail v Financial Service Customers, etc.
Size of Customer - e.g., Multi-national clients v SMEs
In order to keep this manageable however, the use of the Pareto Principle (or the 80/20 rule) can be
used to identify the key segments and market areas to focus on. Additionally, any segments which
are currently providing little revenue but potentially offer exciting returns can also be investigated.
Within each segment, typically, the following analysis is conducted:
Historic and Future Growth
Company Performance by Segment
Key Drivers of the Market
This information can let you know what you can do in each segment in the future upon acquisition.
Should the company actually exit some segments because they are not profitable enough?
Competitive Analysis
Competitive Analysis involves preparing a detailed picture of the current and likely future
competitive environment of the target company. This will ‘drill-down’ into their specific market
segments and high-level niches, which published market research reports usually cannot provide.
Generally, Competitive Analysis will provide for each major market segment or niche:
Market Share Assessment
o Direct Competitors
o Indirect Competitors (e.g., substitute or alternative choices) (e.g., coach service is an
indirect competitor to a train line provider)
Profiles of the Main Competitors
o Current and Historic Financial Performance
o Their Strengths and Weaknesses
o Expected Future Strategies
o Customers’ Favourability and Otherwise Towards Them
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Potential New Entrants
o Including Competing Technologies
Any Historic or Predicted Mergers & Acquisitions amongst Competitors
The Aim of Competitive Analysis
The aim of Competitive Analysis within Commercial Due Diligence is to clarify the ‘real’ position of
the company in its various markets and sectors. Who are the main competitors and what are their
market shares? How is each company perceived and positioned both in terms of financial results,
margins and profitability - and more importantly, what is the future likely to hold for the target
versus the competition?
The aim is to understand the strength of the Warren Buffet style ‘Moat,’ (i.e., what protection or
strength does the target have against competitors in the future?).
The following values can then be derived from conducting Competitive Analysis:
Validating the competitive assessment from management and the vendor – if they are not
either honest or aware of their ‘true’ competitive position, how can you then be confident
about the rest of their forecasts?
Understanding where the competitive strengths and weaknesses of all players in the market
lie. There might be some relatively straightforward deficiencies you could correct to
instantly increase market share upon acquisition.
Understand the future competitive strength and viability of the company. Is it going to
collapse with the launch of a new technology within the next three years for example?
Customer Analysis
Customer analysis assesses historic and current sales and then allows you to assess the likelihood of
management’s sales forecasts being met. This data can then be provided for Financial Due Diligence
and other projection work.
The other requirements from Customer Analysis include:
Understanding customer satisfaction with the vendor
Likely future purchase sales value and volume compared to this year
Any dissatisfaction or potential of switching to competitors or new technologies
Assessment of competitors, especially relative performance compared to the target
company
Confirm the market trends you have discovered in the previous segment
Discovering why ex-customers stopped using this firm and what it would take for them to
return
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Summary
The four elements of Pre-Deal M&A Work outlined in this document will help give you a clear
methodology for increasing the likelihood of success of your future deals with the:
The M&A Strategy
M&A Framework
Acquisition Screening
Commercial Due Diligence
These four tools will allow you to engage all of the key stakeholders in your organisation and involve
them in the end-to-end M&A process, thereby potentially reducing or avoiding post-merger
integration issues which could derail the whole investment. It will also challenge you to be able to
justify your whole M&A methodology and how and why you believe each deal will benefit the
company as a whole.
You can then integrate these four elements of Pre-Deal M&A Work into your whole M&A process, to
create an ‘M&A learning process’ – feeding in the results of each merger into the process to further
refine and improve it, thereby improving the likely success rate of future mergers.
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About Octavia Life Ltd
Octavia Life Ltd is a UK based Pre-Deal M&A Consulting Services boutique consultancy.
We work in a number of ways, from one-on-one consultations and coaching to workshops and full
consultancy services. We also offer executive mentoring. We work with a network of specialists
across Europe and across the end-to-end M&A process.
Rahul Nag, Senior Partner, has extensive experience with Pre-Deal M&A Consulting, including having
worked with Ernst & Young Transaction Services, Burlington Consultants (now part of Deloitte) and
several other leading players serving private equity and trade buyers.
As per this White Paper, we offer the four main elements of Pre-Deal M&A Work:
M&A Strategy
M&A Framework Development
Acquisition Screening
Commercial Due Diligence Services
We also offer in-house training and coaching in the above areas.
Please contact Rahul Nag on (020) 8346 2149 or [email protected] for more information.