Once the strategic analysis is complete, the target identified and the exclusivity period is in effect, things start to get interesting in a buy-side transaction.
The due diligence process provides the acquirer the opportunity to further assess strategic fit, post-acquisition risks and purchase price. It also sets the stage for how the target and acquirer will work together post-acquisition to achieve the strategic vision of the combined organization. To best accomplish these goals, there are a few key activities that acquirers should consider as part of their due diligence process:
Hire Technical Experts
Each target will present unique attributes which fall outside of the acquirer’s area of expertise. Whether it is a new market, therapeutic area, product portfolio, technology or manufacturing process, the acquirer should proactively involve experts early in the process, providing guidance on key opportunities and risks that may not be immediately apparent. These experts may include key opinion leaders, cost accountants, employment law experts, FDA regulatory consultants or intellectual property experts.
In a recent due diligence process, a Locust Walk client hired cost accountants with deep manufacturing expertise to drill down into the details of the COGS associated with a portfolio of almost 400 products. The cost accountants provided insights into areas for cost reduction, the details of which were then discussed with the company and utilized as part of deal negotiations, aiding the client in its valuation assessment and negotiating tactics.
On another engagement for a buy-side client, the acquisition target company had forecasted significant revenue growth in future years for products in early-stage development and the target company’s leadership team had touted the potential for these innovative products in the marketplace. An R&D industry expert consultant was brought in to assess the overall timeline and project costs while the client’s marketing team assessed the commercial prospects for the products. After a detailed assessment from both angles, the forecasted revenues could not be justified in the time horizon contemplated and they were eliminated from the target’s 5-year forecast, significantly reducing cash flows in future years as well as valuation.
As illustrated above, the investment in technical experts to assist the due diligence process is well worth the cost as it informs the buyer and can be used during negotiations to affect deal terms and structure.
Engage Acquirer’s Leadership Team Members
The involvement of the leadership team from the beginning of the process is critical in assessing strategic fit and ultimately realizing the value of acquisition in future years. Functional leaders are experts in their fields and can provide key insight into the commercial, R&D, clinical, regulatory, quality and manufacturing capabilities of the target. Early engagement fosters functional ownership in cases where the target will be folded into the acquirer’s existing organization structure and gives team members the opportunity to weigh in on strategic fit as it relates to the acquirer’s product portfolio, brand, culture and operations.
Leadership team members should be responsible for their respective areas of due diligence (commercial, R&D, clinical, regulatory, quality, manufacturing, finance and human resources) and provide their perspective on the current performance of the target company’s respective function in addition to potential business risks. Their assessment of talent, processes and systems provides insight into actions that will need to be taken post-acquisition to drive performance. Finally, those actions should be translated into 60-day, 90-day and 1-year transition plans which will guide the company and keep goals top of mind. Having clearly articulated goals at a functional level for the combined organization helps ensure team members are working towards the strategic vision for the combined company, ensuring organizational alignment.
During a recent deal, the CEO of an acquiring company required his functional Vice Presidents to provide an organization chart and a transition plan for their respective functions. The CEO also appointed the CFO as transition lead. The CFO became responsible post-acquisition for meeting with the Vice Presidents and holding them accountable for the synergies and cost reductions contemplated in their transition plans. Although the Vice Presidents resisted from the beginning, the CFOs oversight ensured that they followed through with their commitments, making headcount reductions and programmatic cuts as they had committed to during due diligence.
Although revenue synergies may exist in many cases, they are almost always difficult to track. Without transparency, holding team members accountable for performance is impossible. Revenue synergies should be excluded from the valuation model in most cases.
Estimates of cost synergies will arise from feedback provided by leadership team members, either at a business unit or functional level. Team members will provide direction as to the resources required to execute on the strategic vision of the combined organization (people, processes and systems). Leadership team members are also the best resource to analyze and provide feedback on cost synergies as they will be the individuals accountable for realizing those synergies post-acquisition.
Articulate the Strategic Vision Internally & Externally
Create an action plan to communicate the strategic vision of the combined company to all constituents including investors, employees and customers. Revise several drafts with the leadership team, create talking points that executive staff members can utilize and ensure team members are comfortable with the messaging prior to closing. Ensure all customer facing employees are prepared to discuss the merits of the acquisition. Investors, employees and customers send strong signals to the marketplace about the motivations and intent behind an acquisition. The best way to mobilize these advocates is to provide them with the talking points the company wants to communicate.
In a recent buy-side transaction, a client did an exceptional job preparing materials, holding informational meetings with employees and ensuring the leadership team was well prepared to discuss the acquisition. However, post-acquisition several customers become concerned that one of the product lines would be discontinued since it wasn’t mentioned in the press release. The sales team was inundated with questions and concerns about whether the product would be supported in the future and what it meant for warranty contracts. Additionally, one of the leadership team members made an off-the-cuff remark to a customer that he was not satisfied with the acquisition and that he was not convinced the company got a fair deal. That one comment spread like wildfire within the customer’s organization and also began to filter out to competitors, creating undue negative perceptions about the transaction and its merits. Although the team had meticulously prepared and executed a communication strategy around the acquisition, a minor omission and a miscommunication completely shifted the narrative and detracted from the deal’s positive attributes.
In M&A transactions, the company needs to articulate the story. If it is not clear and concise, competitors, customers and others within the industry will hijack the narrative potentially causing significant damage in the process.
The due diligence process in a buy-side transaction can be long and arduous. An acquiring company can position itself for success by hiring technical experts when needed, engaging leadership team members in the process, making realistic assessments of synergies and articulating the strategic vision of the combined organization to the company’s constituents. Considering and preparing for post-acquisition integration during the due diligence and negotiation phases of the deal is the best path towards realizing the full value of an acquisition.
Locust Walk works with buy-side clients from beginning to end, providing relevant guidance and insights throughout the deal process. We serve as an extension of your leadership team, engaging our life science network precisely when it is needed to identify and close on transformational deals. To learn more about our capabilities, transaction structures and key industry expertise, please contact firstname.lastname@example.org.