One of the reasons for which strategic due diligence (SDD) is misunderstood and under-utilized is probably its association with the overall “due diligence” umbrella term. For starters, “due diligence” conjures images of accounting and other data audits. Unfortunately, most of what SDD aims to achieve has nothing to do with an “audit”, and everything to do with “anticipating and strategizing”. In this sense, perhaps “strategic due diligence” is a misnomer. Perhaps it should have a different name. Like “pre-investment value mapping” or something. I will certainly revisit this idea in the near future.
Nevertheless, this association with the “due diligence” umbrella term probably explains why strategic due diligence is often perceived as just another “risk mitigation” tool. The analyst wants to ensure that the “absence of future demand for the company’s products” is a risk that can reasonably be ruled out.
Viewed from this angle, a strategic due diligence can have two outcomes:
- I have found reasons not to go ahead with this deal
- I have found no reasons not to go ahead with this deal
In a sense, you have mitigated your risk if you have reached either of these conclusions. But if you stop there, you have missed out on half the story! You have used the “risk mitigation” potential of SDD, but you have failed to use its “value creation” potential. Indeed, SDD is only a two-sided coin if you bother to flip it!
Worded differently, SDD doesn’t have to limit itself to deciding whether you should put on the brakes (or not) for a given transaction. It can actually help you identify the direction in which you should accelerate the target’s development, post-transaction. The reason is that most of the data collection and analyses conducted during SDD provide you with sufficient material to start mapping out value-creating initiatives in the target company. It allows you to identify growth areas, assess competitive intensity in these growth areas, and even map out and quantify the payoff of specific initiatives to be launched post-transaction. To put it simply, if you want to rapidly unleash value-creating activities in the acquired company, you will certainly gain by having pre-discovered and pre-mapped these sources of value prior to completing the transaction.
This approach also has the obvious benefit of helping you properly value the target. In clearly mapping out what you think will be your active value-creation levers post-transaction, your valuation exercise will be a lot more useful (and accurate) than if you limit yourself to quantifying the “premium-justifying” synergies. With SDD, you will be able to identify not only the value you will be “taking”, but that which you will be “making” (or creating).
To sum up: as soon as you plan to have some active role in a target company post-transaction, your actions will likely be creating (or destroying!) value. By identifying your value-creation plan prior to the transaction, you will be in a much better position to put the right price tag on the company. And you’ll be in a position to swiftly yet strategically move during the oh-so-critical “first 100 days” that follow a transaction.