Operational Due Diligence: Antidote for the Silent Deal Killer
By Michael Sarlitto and Dan Roman
Operational Due Diligence: Antidote for the Silent Deal Killer
As the merger integration proceeded, it was quickly determined that several key enablers necessary to implement the mobile workforce strategy were not accounted for in the original due diligence and business case. Key enablers identified after the fact included a myriad of issues ranging from deploying an effective mobile IT computing solution capable of handling data-intensive engineering analysis to development of HR policies necessary to address mobile workforce time and labor capture.
Administration of payroll tax and medical benefits for personnel splitting time between multiple states also proved to be more challenging and costly than anticipated. As demonstrated in the previous example. Understanding the interactive nature of operations processes is a critical component to an effective operations assessment.
The eight key areas that research has shown to most frequently cause merger and acquisition deal failure are (in no particular order):
Exhibit 1: Top 10 Excuses for M&A Failure
The proof is in the assessment - logistics case study.
The immense, global transportation and logistics industry is vital to businesses of all types. Over the past 10 years, this industry has seen radical change driven by competitive market forces, through political, economic and social pressures, and as a result of technical advances. As the business of freight logistics evolves and as greater economies and efficiencies are achieved, companies are continuously rethinking their strategies, acquiring and merging with others, and fanning alliances with customers in ways that. would have been unimaginable a decade ago. One of the largest regional less-than-truckload ("LTL") carriers in the United States was implementing a growth strategy through the acquisition of a competitor.
The purpose of this 2003 acquisition was to expand the company's operations in new regions of the US. An operations assessment on certain pre-identified assets of the target company was performed including 21 terminals and selected rolling stock. Given the small size of the target, the merger goal was to maintain its primary logistical assets and to roll the various operating functions (finance, marketing, sales, customer service, HR, IT) into its shared services portfolio.
Deciphering the interactive nature of business and work processes for two companies intending on merging their operations is analogous to the "drug interaction" problem oftentimes encountered by a patient undergoing diagnosis and treatment by multiple medical doctors each specializing in a particular ailment.
As in a business, unless there is comprehensive understanding of the operations-related remedies currently in place and operating, whether optimized or not, recommendations for future action intended to create synergy, improve operations or enhance shareholder value may be ill-advised and as we have observed, will actually prove counter productive in assembling a deal intended to create business value versus destroy it.
We have found over 900 inter-dependencies between the eight key functional assessment areas that, based on the extensive root cause analysis of over 200 case studies of failed mergers and acquisitions described earlier, has been shown to directly contribute to the ultimate failure of merger and acquisition activity.
Goals of the operational due diligence were to fully understand the target company's logistical infrastructure and capabilities; look beyond the financial and legal due diligence for the 21 terminals; and attempt to discover any hidden surprises that may affect "go" / "no-go" decision making and negotiations between the parties. In addition, identification of key risks and opportunities that may affect long term deal success (revenue, cost, etc.) and recommendations for the integration of the distribution and logistics functions were expected outcomes of the assessment. Highlights of an operations assessment conducted in a matter of days yielded insights in the areas shown in Exhibit 2.
Exhibit 2: Logistics Case Study
In the transportation and logistics industry, the successful companies do a particularly good job of filling customer orders quickly, accurately and efficiently. As the engagement team was investigating the target's use of technology within their terminal operations, including its use of Warehouse Management System (WMS), Radio Frequency (RF) technology, Bar Coding, Electronic Data Interchange (EDI) and Automated Material Handling Equipment, an item was discovered that would have been
missed with a due diligence scope limited to financial and legal detail.
As it so happens. the target company had invested in an integrated logistics platform technology. This web based technology enables the lead logistics provider to communicate with all their transport providers through a single real-time interface. This connection is made through the internet, and is robust and reliable. This platform allows the transport providers to provide regular updates on shipment status throughout the life cycle of the shipment.
This allows for pro-active notification in the event of delays or incidents. This ensures that transport providers are able to accept or reject the shipments allocated to them. And through the logistics platform they are able to proactively notify the lead logistics provider in the event of delays or incidents en route.
As a result. the acquirer's new found technology enabled for a system wide upgrade which produced efficiencies many more times than originally anticipated. In addition, had the detail gone unnoticed through the transaction, the very core of the target's operational superiority would have been destroyed as part of the transaction and the resulting M&A failure would more than likely have been chalked up to one of the top ten excuses used to explain M&A failures captured in Exhibit I.
On average, 80 percent of newly-merged or acquired businesses
fail within 18 months of closing. The majority of these failures do not take place because of poor financial valuations or auditing skills. Based on root cause analysis of over 200 cases of failed mergers, a majority of failures can be directly linked to failure to discover, assess and account for operational risks inherent in business and work processes.
This strongly suggests that operational risk should be included in future due diligence audits for proposed mergers and acquisitions of all sizes. In order to reveal key interrelationships, disconnects and higher order synergies between operations-based functions, it is crucial to gather critical operational-based intelligence.
An operations assessment can meet this charge by using an integrated and repeatable process; examining business activities, processes, and operations in a comprehensive manner, and aligning the due diligence activity and intelligence with the decision-making time line and goals of the acquisition and/or merger.