Performing due diligence prior to completing a merger or acquisition involves looking at a laundry list of things in multiple categories. Companies like Utah-based Mezy, Inc. look at company offerings, ownership and management, financials, and so forth. They also look at strategic issues.
Strategic questions are often overlooked when a company's financials appear compellingly positive. However, proper due diligence leaves nothing uncovered. It asks and answers key strategic questions that companies need to know before proceeding with a deal.
Here are just three strategic questions due diligence should answer:
1. What are the benefits in terms of products or services?
There are times when companies acquire competitive rivals simply to eliminate the competition. But more often than not, acquisitions occur because companies want access to the products or services offered by the target company. Thus, due diligence requires looking into the benefits of the deal in terms of those products and services.
A deal might bring on board new products or services the acquiring company didn't previously offer. Take Amazon's acquisition of Whole Foods, for example. Prior to the deal, Amazon was not involved in the grocery market. Now they are. Whole foods brought products and services to the table that Amazon hadn't previously offered.
Products and services that can be done away with are also part of the due diligence equation. One of the two companies might be holding on to a product or service that has long outlived its usefulness. The merger or acquisition provides the necessary motivation to dispense with it.
2. What are the synergistic implications?
In the business world, a synergy is an interaction between two or more components – e.g., business practices, assets, employee functions, etc. – that result in a value greater than the combined values of the two companies should they remain separate. In a perfect world, the singular value of the resulting entity should be greater than the combined value of separate entities.
A good example of positive synergy is bringing two research and development departments together. Separately, the departments might be able to achieve very worthwhile goals. But combine them and you may end up with a more efficient R&D environment capable of producing exponentially more value in future projects.
Unfortunately, investigating synergistic implications is not as easy as it appears on paper. There is a lot about business synergies that really isn't quantifiable. You have to observe, take your best guess, and see what happens. Nonetheless, due diligence requires closely examining synergies.
3. Are the two companies a good strategic fit for one another?
Most important to this particular aspect of due diligence is whether or not the two companies are a good strategic fit. Separately, each company has its own strategic priorities. Each has its own mission and vision. Combine the two and there is bound to be some strategic conflicts. They will have to be resolved in one way or the other.
Strategic fit is to mergers and acquisitions what cultural fit is to hiring. You strive to find a good fit in order to avoid problems down the road. More than one acquisition has been completed among two companies that were not a good fit for each other. In nearly every case, the acquired company was eventually spun off or sold.
Due diligence is not just about looking at balance sheets, profit and loss statements, and cash flow. It is also about looking at the strategic implications of a merger or acquisition. Strategic issues must be included because they will affect how smoothly the new company will get from where it is to where it wants to be.