Investing

Mergers and acquisitions are governed by due diligence. They have to be. It is just foolish for one company or group of investors to acquire a target without first fully understanding what they are getting themselves into. Due diligence provides the necessary information to make sound decisions. That said, what happens when due diligence uncovers a target’s superpower?

What we refer to as a superpower, for the purposes of this post, has also been referred to as a target’s ‘special sauce’. A superpower can be any aspect of the target business that is unique and essential enough that it will be retained in its current form post-acquisition.

A superpower can be a product or technology. It can be a process, a solution, or a body of knowledge that is unique to the target business. Whatever it is, it is important enough that losing its distinct benefits during the integration is not an option.

Build Integration Around It

Something strong enough to show up in a due diligence analysis as a superpower is worth preserving. But to preserve it, the buyer cannot simply integrate it into its own business operations. Rather, integration needs to be built around it.

Perhaps you are familiar with the story of Edith Macefield and her now-famous farmhouse in Seattle, Washington. Macefield refused to sell her home to developers, intending to live there for as long as she could. She wanted to eventually die there as well.

To make a long story short, she steadfastly fought efforts to acquire her property. The developer eventually had to build its towering commercial building around it. To this day, the house remains on the same site, surrounded on three sides by the modern world.

That house was important enough to Macefield to hold on to. And now, though she has been dead for quite a number of years, it is important enough to both her family and the city to keep it intact. That house was Macefield’s superpower. It still stands as a monument to what made her who she was.

Emphasize Its Strength

In addition to building integration around the target’s superpower, emphasizing the superpower’s strength will only help make it stronger. Again, a comprehensive due diligence analysis is key here. Diligence reports should reveal the strength of the superpower in question. It should reveal why that particular technology, process, etc. is so valuable.

The strength of Macefield’s house is that it is a symbol of doing the right thing. Every day it remains demonstrates that average people can fight for what is important to them and win in the process. Likewise, the strength of a target company’s superpower can be leveraged to make the entire company stronger moving forward.

Develop New Best Practices

The one trap of a target company’s superpower is not adapting the buyer’s business to it. If the superpower is to be retained, the buyer has to figure out a way to make it work with its own existing culture, processes, etc. The best way to do that is to develop new best practices that act as a bridge between what already exists and what the superpower brings to the table.

Plenty of acquired companies have been blown to bits because buyers didn’t pay attention to what due diligence reports were telling them. They completed their acquisitions without recognizing target superpowers. As a result, those superpowers were lost. And when the superpower goes, so does the reason for acquiring a target.

When due diligence uncovers a target’s superpower, it is in the buyer’s best interest to do something with that knowledge. Otherwise, what is the point?

Diligence reports are a key aspect of our business. Given that we offer due diligence-as-a-service (DaaS), every project we complete culminates in diligence reports we present to clients. Clients use those reports to decide how to proceed with a merger or acquisition. The better our information, the more informed the client’s decision.

As useful as diligence reports are, they do not tell the whole story. They cannot. Diligence reports are based on hard data and analysis of a number of business intangibles. But they can only offer a glimpse of what a company currently looks like compared to what it might look like in the future. It cannot accurately predict what is coming. There are just some things due diligence cannot tell you.

Here are five things you typically won’t learn from due diligence reports:

1. What the Road to Success Looks Like

We often compare mergers and acquisitions to traveling along a road with only a general destination in mind. There are landmarks and attractions along the way. The journey begins once the merger or acquisition is complete. What will the road look like? No one knows.

The road to success could be mostly straight and narrow. It could be long and winding. It is likely to have some relatively flat spots as well as a good selection of hills and valleys. There may even be mountains to climb and bridges to cross. That is the thing about the future. You can only make an educated guess. You really don’t know what it holds until you get there.

2. If a Deal Is Future Proof

Due diligence does its best to uncover areas of concern. But thanks to limited data and an inability to see the future, there are no guarantees that a deal is a future proof. Your company could go through with a very strong acquisition only to discover that its long-term consequences were not what management anticipated. It may be necessary to offload that company at some point down the road.

3. How Quickly to Proceed

In the world of mergers and acquisitions, timing is often more important than speed. Unfortunately, diligence reports cannot really tell you how quickly to proceed. You have to look at extenuating circumstances and a variety of environmental factors to figure that out. Diligence reports can tell you whether or not moving forward is a good idea, but they cannot tell you how quickly to move forward.

4. How Smoothly the Transition Will Go

Due diligence information can tell you a lot about a company’s management and culture. Still, there are plenty of variables due diligence doesn’t uncover. Blame it on the simple fact that companies don’t often reveal the negative aspects of their businesses when looking for suitors. Your company might end up in a transition that is anything but smooth. The deal looks good on paper, but completing the transition ends up being more difficult than anticipated.

5. Whether or Not the Target Is Ready

Over the years, more than one deal has ended up being more difficult than necessary because the target company wasn’t ready for the transition. Even though they were actively looking for suitors, they were not actively preparing to be acquired. There is a significant difference between the two.

We offer DaaS because we understand just how important due diligence is to successful mergers and acquisitions. We wish diligence reports could answer every question to the extent of absolutely guaranteeing success. But that is not the case. There are just some things diligence reports cannot tell you. That’s where experience, intuition, and lots of sound advice come in.

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