Looking Beyond Numbers--Holistic Due Diligence Approach to M&A Success

Mergers and Acquisitions (M&As) are oftentimes seen as “shortcuts” for an acquiring company to break into a new market, expand to a new location, add a new product to its portfolio, or acquire a new customer base. Of course, this is generally done with the hope of increasing shareholder value. However, a recent Grant Thornton study found that only 14 percent of all M&A deals exceed the acquiring company’s initial expectations for income or rate of return.

What's stopping M&A deals from meeting or exceeding expectations? Jim Peko, Grant Thornton’s transaction services managing principal, and Russell Daniel, the firm’s tax partner, said for a deal to succeed, companies should take a holistic approach to their M&A diligence--that is beyond the traditional financial and tax due diligence approach.

Peko and Daniel discussed the holistic approach and what drives deal success in a phone interview with Bloomberg Tax.

Never Too Much Due Diligence

According to Peko, when exercising due diligence, companies should use a more comprehensive approach by exercising due diligence on the enterprise as a whole. “At the end of the day, better diligence makes it easier to drive transaction value.” Peko said.

That means to maximize sustainable deal value, due diligence should be conducted not only in the traditional finance and tax areas, but also on the quality of all aspects of operations, including a company’s IT, supply chain, culture, and human resources.

Taking IT as an example, only 19 percent of the survey respondents believed their IT due diligence was strong. However, “it [an IT system] is the backbone of an organization. It supports an organization’s growth and management decisions, and should be fully evaluated.” Peko said.

Avoiding Culture Clashes

Culture clashes between the acquiring and acquired organizations were listed as one of the primary reasons deals underwhelm. “Just because companies have similar profiles, there can still be a lot of [cultural] differences.” Peko said. Therefore, it is important that the acquirer and acquiree understand what their commonalities and differences are early in the M&A process.

“Understanding the culture commonalities and differences upfront will allow companies to identify best strategies to reinforce the commonalities and address differences,” Peko said. “So that when you [say] to go right and they [the company you acquired] go left, you won’t be surprised and [will] know how to manage.”

Factoring in the Impact of the New Tax Law

According to Daniel, traditionally, tax due diligence has just been another item on the M&A deal’s checklist. “If there isn’t an issue, they [the acquirers and acquirees] would just check it off the list. But, tax professionals need to go deeper than that,” he said.

The survey shows that only 26.5 percent of the respondents believed their tax due diligence, planning, and structuring were strong.

Daniel said tax due diligence isn’t just a “checkbox.” Companies should develop value-added M&A tax planning strategies and make sure the tax structure, under the new tax law, meets their operational objectives.

Ultimately, Peko and Daniels emphasized the value that taking an early and holistic approach to M&A due diligence can add to the development of expectations and the overall success of a deal. 

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