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Before doing M&A, it is crucial for acquirers to target the right business, in the right market. Otherwise, it could potentially be a costly mistake that would waste the company’s time and money. To prevent this, Andrey Galiuk, Vice President of Corporate Development and Investor Relations, shares his expertise on how to perform strategic due diligence in M&A.
“You need to be both the biggest proponent of the deal and the biggest skeptic of the deal at the same time.” - Andrey Galiuk
What is strategic due diligence
According to Andrey, strategic due diligence is the work and thinking that happens before going all-in. It's the process of building conviction about the opportunity to invest money productively and responsibly before placing the bet and diving into final diligence. Ensure you know what exactly you're buying, and not stepping risk.
Entering the right market
Andrey uses the pond (market) and fish (target company) analogy. If you pick a wrong pond, you could end up with too little fish, the wrong kind of fish, or not the taste your family likes. You can be the best fisherman with the best equipment, but your family will still be hungry. That's why it's important to pick the right pond first.
First, you need to map out the universe of markets and determine how far you are willing to go. Some can accept any good business in their portfolio, and some would be more comfortable investing closer to their set of competencies.
Then you evaluate these markets, these ponds, through a lens of strategic attractiveness and fit. The strategic fit will be trickier, and must be assessed properly.
Finding the right target company
After finding a good pond, it's time to target a specific fish. There is a strategic element to the evaluation of targets before the confirmatory diligence. This includes things like market share, the competitiveness of the products, and understanding why customers choose one product over another.
Analyzing wins and losses is crucial. Do not just accept superficial explanations like 'they're gaining market share' or 'it's growing.' It’s important to look deeper than that.
Red flags during strategic diligence
Big hockey stick projections are extremely common. From a business evaluation standpoint, understanding big wins and losses, and why they're happening, is crucial. If it wins, it helps you understand why they're strong, why they are winning. If they lose customers, ensure it's not due to obsolete technology or an emerging competitor.