Effect of Minimal Due Diligence on Post-Merger Integration
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Recently, I have been working with a client that completed a lack-luster due diligence internally for an acquisition of a company more than 3x its size that it will merge with over the coming months. We were engaged for pre-close planning but had limited capacity to dig in deep to the targets business processes, since they were deemed proprietary until after closing by the parent company it was being carved out from. This resulted in our consulting team’s inability to provide good guidance for post-close merger integration especially because of a lack of any detailed reports from the due diligence phase and a lack of access to that information during pre-close planning. Additionally, the business leaders who handled the due diligence process are also company shareholders of the private stock who will profit from a successful deal and were generally very excited to acquire such a large company in a similar industry. Their excitement and interest likely resulted in overlooking red flags found during the due diligence process. We advised them to use outside counsel for due diligence for future acquisitions, but in the meantime are picking up the pieces in the post-close environment. Have others had clients go through something similar before? How did you creatively navigate through limited due diligence reports?
Emily,
I would come in and create my own diligence checklist through which we will “re-create” and deploy a new 100-day plan. It may require investment and “rework,” but it must be done.
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In such a critical situation it is important to raise customer awareness on the topics and let him know that ott would be preferable to launch a post close due diligence. I recommend launching several streams in parallel:
– Launch the financial integration and manage to get a first financial risk assessment by end of week 1
– Quick cultural assessment followed by the definition of the target expected culture by end of week 3
– Identify the 10 key employees to be retained by week 2, get it validated by HR management and make a formal retention package offer by week 3
– Make announcement of the transitory organization and organigram by week 3
– Deep dive into the client portfolio and quickly assess the up selling and cross selling opportunities by week 2, client priorities and new relationship manager for the top 10 clients representing 80 % of the sales by week 3
– Build up a communication plan by week 4 and communicate only vouched informationMinimal due diligence can seriously undermine post-merger integration by leading to unforeseen challenges, such as cultural misalignment, undisclosed liabilities, or operational inefficiencies. Without thorough examination of the target company’s financials, operations, and organizational culture, unexpected problems may arise post-transaction. This can delay synergy realization and increase integration costs. In my experience, conducting extensive due diligence upfront helps identify risks early and allows companies to plan integration strategies that minimize disruptions and enhance value creation. What specific areas of due diligence do you think are often underestimated?
I’ve encountered similar situations where inadequate due diligence created substantial hurdles in the post-merger integration phase. In cases like this, the lack of a deep dive into the target company’s internal processes can lead to missed red flags and integration challenges. In my experience, one way to mitigate the negative impact of minimal due diligence is to conduct post-close diagnostics.
This involves quickly assembling a cross-functional team post-merger to identify any operational, financial, or legal gaps that were missed during the due diligence phase. The goal is to address these gaps proactively rather than allowing them to snowball into larger issues.
Also, if there’s limited access to detailed reports pre-close, collaborating with external consultants who have experience in similar industries or markets can offer additional insights. This external expertise can provide the buyer with a more objective viewpoint and help anticipate integration challenges
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