It shouldn't be surprising that M&A researchers have shown that companies with good acquisition candidate evaluation processes make significantly better acquisitions than those that don't. The question is: what are the characteristics of a good evaluation process?
The answer has two components. The first involves the kinds of evaluations performed and the links amongst them. Key evaluation activities include:
- Capabilities & Market Position Assessment: A structured, in-depth assessment of a candidate's organizational capabilities as well as an evaluation of the candidate's product/market positioning. (Depending on the nature of the business, it is oftentimes critical to support this assessment with the work of an outside firm that can perform rigorous strategic & competitive due-diligence);
- Cultural & Managerial Process Evaluation: A structured assessment aimed at identifying cultural differences and evaluating managerial processes;
- Financial Valuation: Includes discounted cash flow analysis, review of comparable transactions and the value of public comparables, dilution/accretion analysis, and the use of other appropriate valuation techniques;
- Operational Due-Diligence: A detailed review of operations focused on auditing operational metrics;
- Financial Due-Diligence: An extremely detailed, rigorous audit of financial statements and controls. (Sometimes this function is best performed by outside auditors working closely with acquirer's financial personnel).
The second component of a good evaluation process relates to how the actual process works. The best evaluation processes are those that: (a) are driven by objective analysis; (b) have a high level of involvement of the appropriate business unit executives; and (c) achieve consensus on how the candidate will create value for the acquirer. The worst processes are those that (a) are susceptible to organizational politics; (b) lack appropriate business unit leadership; and (c) result in an ambiguous notion of how the potential acquisition will create value.
