M&A&Ds Are a World of Unknowns
In 2002, the US Secretary of Defense Donald Rumsfeld explained the limitations of intelligence reports as follows: "There are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know."
At the time, Rumsfeld was widely derided for his tongue-twister, but history has been kinder. Indeed, Rumsfeld’s observation has been welcomed in fields such as evolutionary science and elsewhere. And it is perfectly applicable to the world of mergers, acquisitions, and divestitures, where knowledge, and the intelligence-gathering skills that yield knowledge, are central to deals going ahead or not. We call it due diligence.
Assessing the procurement function is the start of knowing the unknown
From a procurement and supply chain perspective, intelligence gathering starts with a textbook standard review – we are validating the known knowns and searching for the known unknowns. We look at the procurement operating model, analyse the entity’s spending, benchmark it against its peers, and assess the landscape of competitors and trends in that industry. This nuts & bolts analysis allows a high-level assessment of the opportunity to be made pretty quickly.
Moreover, early analysis feeds directly into knowing how one might value an entity’s potential. A hard look at operating costs, cost of goods sold, working capital and customer service allows a lot to be known, and the costs and risks likely to be associated with achieving an acquisition or divestiture.
Similarly, an analysis of the entity’s supply chain is equally revealing. A supply chain expert will ask some fundamental questions, like:
- What is the operating model of the entity’s supply chain?
- How efficient is the network being used? And therefore, what efficiency opportunities exist?
- Have transport and warehousing arrangements kept pace with the trends in the industry?
- How is working capital being deployed?
The picture we get from the supply chain assessment goes to making a judgement as to the relative maturity of the organisation, and this, in turn, plugs into assessing the risk and relative ease of achieving the desired outcome.
The assessment of the procurement and supply chain function provides a framework for due diligence. The assessment will equip an expert team with the knowledge they need to then search for further known unknowns and the even more elusive unknown unknowns. The team will have a strong sense of where weaknesses, even booby-traps, may lie.
Forensic analysis of commercial and technological states reveals unknown unknowns
In modern due diligence, it is helpful to split the work into the commercial operations and technological sides of an entity, even though we know there will be some overlap.
From a commercial operations perspective, due diligence consists of interviews with key procurement people, business stakeholders and suppliers, while also undertaking site visits, reviewing data from the data room, benchmarking, validation, and opportunity assessment.
The mantra ‘decisions made on data’ applies nowhere more powerfully than in due diligence. An expert team will forensically sift through the P&L, spending data, contracts, technology architecture, – there’s that overlap – stated KPIs, as well as internally consultant governance and performance reporting. It’s an understatement to say the yield is rich.
The entity’s technology gets a similarly forensic treatment. Interviews, current state assessment, an appraisal of the assets and, again, data. This time, there is a focus on what the CIO and the technology architecture can tell the team. The most critical aspects of a merger or separation (demerger, divestment, etc.) deal relate to an entity’s technology due diligence, as valuations and ROI will be impacted significantly if system or architecture synergies or dis-synergies are not documented up front and used to inform deal outcomes.
Mergers, acquisitions, and divestments can be influenced by the sentiments and emotional instincts of even the most seasoned corporate leaders; especially in boom times like post-GFC and more recently with COVID. Hard intelligence, gained from expert analysis, is a powerful counterbalance to instinct. For it to be truly valuable, it must be developed and delivered by specialists who know what the data tells them, and who know what frank and fearless advice sounds like.