TripleIC
Do you have valuable customers
who are just walking away?
We help you keep your best customers
Follow this arrow
When you have finished then click here to see all articles
ON THE M&A TRAIL
Is due diligence doing all it should for your clients?
Do mergers and acquisitions create shareholder value or destroy it? A recent study by the DePaul University of Chicago, Illinois, reported an interesting finding. The sellers of the target business make a profit, estimated at from 10 to 30 percent. This means that the value of the seller’s equity increases by about that margin on or around the date the transaction is announced. The DePaul scholars politely decline to mention cases where the profit surge occurs before the announcement, though we all know that happens.
The experience of the buyers in contrast varies widely according to different studies examined by the DePaul academics. But the debate is just about how much on average the buyers lose, not how much they gain. Most M&A transactions are a device for transferring unearned capital value from one set of shareholders to another - and always in the same direction, towards the seller.
These figures reflect the experience of many participants in and observers of the capital transaction market. It’s very hard to spot a winning acquisition. To persuade shareholders to part with their stock, you have to offer them something over and above the current market. It’s easy to talk yourself into a rosy view of the synergistic potential of the transaction - either in saved cost or increased revenue.
Emotional Attachment
I have been a director of two companies that were bought by bigger raiders. Butler Cox plc was bought by Computer Sciences Corporation and Istel Limited by AT&T. In both cases I would argue that these huge, highly successful and hard-headed companies formed an emotional attachment to the target businesses. They literally fell in love with us - and paid a price for the experience.
This is in several ways a paradoxical situation. Everyone knows that it’s more common to reduce shareholder value by making an acquisition than to increase it. Both the analytical numbers and the overwhelming weight of evidence argue the same case. So why do big, successful and savvy businesses keep backing the same losing horse?
Sometimes they have little choice. A friend of mine works in the glass making business. Twenty years ago every developed nation had its own glass making business. Today glass making is a global business. There is room for only a handful of mighty manufacturers. The choice was to eat lunch or be lunch.
Improving Due Diligence
But it isn’t always quite such a stark choice. Often companies have the option to bid or not to bid. But here is a huge paradox. A company is bought or not bought on the basis of its hoped-for future performance. You buy a business not because you admire its past but because you believe it adds to future profits. Yet the process of due diligence is fatally flawed. The buyer and the buyer’s advisers spend endless hours going over the report and accounts, looking for weaknesses such as contingent liabilities. Yet they spend very little time looking at the future.
- What if the customers of the target firm are only weakly engaged with it? What if their loyalty is to the current board rather than the brand?
- What if a substantial number of their customers go AWOL before the ink is dry on the deal?
- Customer churn is, after all, recognized as the number one XXI century devourer of profit and share value.
Concentrating on past performance alone is like steering a boat by examining the wake. What’s true of M&A transactions is also, of course, true of an IPO. Why ask investors to stump up cash without offering some comfort about the durability of the customer base?
Customer Engagement is key
Here is the punch line. The process of due diligence should focus serious attention on the issue of Customer Engagement, which determines future profits. The extent to which customers are seriously engaged with a supplier can be measured, if the measuring mechanisms are precise and subtle enough. Remedies can be applied if weaknesses are found.
But there’s always been a problem. Customer Engagement is not easy to measure. A study by the Economist Intelligence Unit for CEOs showed that almost half believed that the main problem with Customer Engagement was the difficulty of measurement.
So now there is a way. The most revealing such mechanism is the TripleIC Protocol, so called because it was developed by Professor Tom Lambert, author of the celebrated book The Power of Influence. Lambert believes that an assessment of the firm’s Customer Engagement Index [TM] is not only practical but will become mandatory, an essential part of due diligence. When you look at the track record of acquirers and the sums involved, few would doubt that he is right. M&A advisory services have a chance to get ahead of the pack by treating Customer Engagement as an essential element of due diligence, a sine qua non of any quality M&A transaction.
We value your feedback on our website. For comments or queries on this page click here
This site is © TripleIC. Click here for terms of use.