A specialist management firm has issued a warning on business mergers and acquisitions, claiming that 70 per cent fail largely because of two common oversights in the due diligence process.
Craig Henshaw, director of Merger Transition Management, noted that even corporate giants can and do get it wrong, citing the failed Wesfarmers strategy of taking Bunnings to the UK through its acquisition of established British DIY chain Homebase.
In May this year, Perth-headquartered Wesfarmers announced its experiment had failed, and that it would sell all Homebase assets “for a nominal amount” and that the 24 Bunnings stores, which had been branded as a pilot, would revert back to Homebase branding following completion of the sale.
“Homebase was acquired by Wesfarmers in 2016. The investment has been disappointing, with the problems arising from poor execution post-acquisition being compounded by a deterioration in the macro environment and retail sector in the UK,” Wesfarmers managing director Rob Scott told the ASX at the time.
Mr Henshaw said that a failure to identify and properly assess critical issues during the due diligence process is the most common causes of M&A problems.
“Once the financial and legal — and in some cases ‘commercial’ — due diligence is completed, acquirers often assume that all their major risks are identified (if not necessarily mitigated) and they’re in a position to finalise the business case and to proceed through the bid, negotiation, transaction and subsequent integration stages,” Mr Henshaw said.
“The flaw in this approach is that these traditional, and absolutely necessary, due diligence elements lack two critical elements: scope and comparison. That is, the missing comparative due diligence.”
He said that scope is required to understand the various “moving parts” of any business, some of which are less tangible than others, including culture, particular strategies and digital presence.
“[But] traditional approaches to due diligence do not cover the thorough investigation of this range of business-critical and integration-critical factors.”
The same is true, Mr Henshaw said, of comparisons between the acquisition target and the purchaser, particularly of business-critical components.
“The comparison enables more accurate analysis of strategic and cultural fit (crucial factors in M&A success), better business case development and lower-risk integration planning,” explained Mr Henshaw.
“As well as highlighting potential showstopper risks, this process can also uncover ‘hidden gems’ (e.g. capabilities, processes, offerings) in the target that will provide leverage to the acquirer’s profitability and ‘sweeten the deal’ in the medium to longer term for their shareholders.”
It comes on the back of an increase in M&A activity in the June quarter, surging by one-third, according to one report.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.