Asian Mergers and Acquisitions: Riding the Wave

CHAPTER SIX

Due Diligence

Doing a proper due diligence before an acquisition is critical in helping buyers clarify strategy and synergy expectations and uncover hidden issues. Classic due diligence focuses on the company’s financial and commercial aspects. Increasingly, operations due diligence is used as a complement to classic due diligence. Operations due diligence (ODD) evaluates the entirety of the target’s operations to identify potential improvement opportunities that can drive the target to full operational potential and uncovers hidden land mines that may constrain or even disrupt the growth of the target.

Sad stories of gigantic merger failures have become prime time media fodder over the past few years. The painful sagas of AOL Time Warner, Corus, and Vodafone have become textbook cautionary tales. Veterans of mergers and acquisitions (M&A) trade excruciating war stories among themselves about a multitude of smaller, less notorious debacles.

Historically, half of all M&A activities have fallen short in creating lasting shareholder value. A 10-year A.T. Kearney study on the stock performance of companies following a merger reveals that nearly 50 percent of the biggest mergers and acquisitions failed to produce total shareholder returns greater than those of their industry peers in the first two years after the deal closed. Only 30 percent outperformed their industry peers (by 15 percent or more) and had earned a penny more in profitability. Five years after the merger, ...