Adding Operations Risk to Due Diligence Audits Enhances M&A Outcomes
​By Michael Sarlitto
​Research by organizations like A.T. Kearney, PricewaterhouseCoopers, McKinsey, and Business Week is conclusive – there is a startling failure rate for newly-acquired or merged businesses. This is bad news for all of us who help companies grow through mergers and acquisitions. On average, 80 percent of newly-merged businesses fail within 18 months of closing – 30 percent fail to meet expectations and 50 percent vanish entirely.

Yet a majority of these failures do not take place because of poor financial valuations or auditing skills. Extensive experience, case study work, and a collection of lessons learned across a broad cross section of industries shows that the poor statistical performance is caused by a failure to discover, ssess, and account for operational risks inherent in business and work processes. This strongly suggests that operational risks should be included in future due diligence audits for proposed mergers and acquisitions of all sizes. 

We recommend a three-step integrated process to account for operational risks inherent in any transaction: ​
  • First, gather critical operational-based intelligence using an integrated and repeatable process.
  • Second, assess business activities, processes, and operations in a comprehensive manner.
  • And third, align the due diligence activity and availability of intelligence with the decision-making timeline and the goals of the acquisition and/or merger.
​This integrated approach toward gathering, assessing and aligning a firm’s processes, operations and activities will reveal key interrelationships, disconnects and higher order synergies between operations-based functions. By modifying generally accepted due diligence practices to include operational-based factors, takeholders will be better informed to make ‘go’ or ‘no go’ decisions, better prepared for merger implementation, and subjected to fewer surprises.

​Using an operations-based assessment process to discover, assess, and account for operational risks, coupled with typical due diligence, can greatly increase the probability for merger and acquisition success. And that’s good news for all of us. 
​Using an operations-based assessment process to discover, assess, and account for operational risks, coupled with typical due diligence, can greatly increase the probability for merger and acquisition success. And that’s good news for all of us.