Mastering the Merger - Ask and answer big questions

Due diligence all too often becomes a "check-the-box" exercise, collecting reams of data but failing to tell executives what they need to know to decide whether to consummate the deal. The best deal makers zero in on the big questions - the ones that, once answered, will demonstrate whether or not there is a match between the target and the acquirer's investment thesis. What's critical in due diligence isn't how much you know; rather, it's determining what you don't know and should know, and then nailing down that information.

Unfortunately, that kind of disciplined due diligence is an exception. When Bain surveyed 250 executives involved in M&A, only 30 percent expressed satisfaction with the rigor of their due diligence process.

To determine which deals to close, build your due diligence process around three critical steps:

Test the investment thesis. Concentrate on the big questions, and thoroughly answer them by building a proprietary, bottom-up view of the target and its markets.



	Bridgepoint Capital: Testing the investment thesis

	Texas Pacific and Beringer: Measuring the target's stand-alone value

	Royal Bank of Scotland and National Westminster Bank: Determining synergies



	The Four C's Framework

	Synergy valuation

Determine the target's stand-alone value based on a rigorous understanding of cash flows. Your due diligence process must first establish a baseline-that is, your target's value under "business as usual" conditions. Most of the price you're paying should reflect the business as it is, not as it may be after you own it. And remember this: half of the executives Bain surveyed discovered their target acquisition had been dressed up for sale.
Measure the true value of synergies. According to Bain's M&A survey, two-thirds of acquiring executives said they had overestimated the synergies available from combining companies, and that this miscalculation had played an important role in a deal outcome that was ultimately disappointing. Begin by evaluating cost savings, move out to revenue synergies and account for the probability of success as well as the time required to achieve them. Assess negative synergies-such as interruptions to service, lost customers and employee turnover-and subtract them from your estimate.

Throughout the due diligence process, test what you're learning against predetermined "walk-away" criteria-criteria that indicate the acquisition does not make sense. If any of those tests leads to irreconcilable doubt, the next step is obvious: Walk away from the deal.

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