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 info@octavialife.com for more information.