Commercial Due Diligence: The Key to Understanding Value in an Acquisition

417 Pages·2006·5.89 MB·English

by  Peter Howson

Commercial Due Diligence
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Commercial Due
Diligence
The Key to Understanding Value in an
Acquisition
PETER HOWSON
#PeterHowson2006
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
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withoutthepriorpermissionofthepublisher.
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PeterHowsonhasassertedhisrightundertheCopyright,DesignsandPatentsAct1988tobeidentified
astheauthorofthiswork.
BritishLibraryCataloguinginPublicationData
Howson,Peter,1957–
Commercialduediligence:thekeytounderstandingvalue
inanacquisition
1.Consolidationandmergerofcorporations–Management
2.Businessintelligence
I.Title
658.1062
ISBN0566086514
LibraryofCongressControlNumber:2005934407
TypesetbyTradespools,Chippenham,Wiltshire
PrintedinGreatBritainbyAntonyRoweLtd,Chippenham,Wiltshire
Contents
ListofTables ix
ListofFigures xi
Introduction xv
PARTI: THE BASICS
1 What’sItAll About? 5
WhatisCDD? 9
Market duediligence 13
Whydue diligenceisbadly done 15
Usingdue diligencetoreduce risk 16
A definitionof CDD 18
Overlapwith financialdue diligence 22
Applications of CDD 31
Conclusion 31
2 GettingStarted 33
IsCDD needed? 33
Wheredowestart? 37
Who shouldcarry outthework? 38
Selecting CDD advisers 38
Planning thework 40
The CDD team 41
Timetable 41
Fees 42
GoodCDD practice 43
Conclusion 44
PARTII: ANALYTICAL TECHNIQUES
3 WhichMarket isthe TargetIn? 49
The basics 49
Differentiation and segmentation aretwototally different things ... 50
... And strategicand operationalsegmentation are notthesame
things either 52
Strategic segmentation 56
Products and servicesthat gointothemarket 65
Market sizing 67
Conclusion 71
vi Commercial Due Diligence
4 Industry Attractiveness 73
Donot forget your basic economics 73
Analysing industryattractiveness 80
Other waysof classifyingindustries 93
Forecasting industryprofitability 96
Conclusion 97
5 WhichCustomers isthe Target Serving? 99
Operational marketing segmentation 99
Demographic 100
Psychographic 104
Purchasing approach 105
Situational factors andpersonal characteristics 107
Conclusion 108
6 Abilityto Compete 111
The analysis ofresources and capabilities 111
Cancompetitive advantagebesustained? 123
Brand strength 133
Distribution channels 137
The useof IT 141
Ability tocompete overtheindustry life cycle 142
Conclusion 145
7 CompetitorAnalysis 147
Some commonmyths 147
Whatwewant tofindout 148
Identifying thecompetitor’s objectives 149
Conclusion 153
8 The NewReality 155
The beleaguered company 155
Customer segmentation 156
The target’sapproach 175
The salesforce 176
Beyond satisfactionratings 177
Using thetarget’s customersatisfaction measures 180
Contract-based businesses 181
Conclusion 182
9 CDDinSpecial Situations 185
Newtechnologies 185
Diversification 198
Assessing newbusinessmodels 199
JVs and alliances 201
Declining industries 208
Recoveryplays 210
Conclusion 211
Contents vii
10 Assessing Management 213
Objective 213
Reporting 223
Communication with management 228
Culture 228
Conclusion 231
11 Using the Output 233
Alwayskeep thebigger pictureinmind 234
Spreadsheetmodelling 241
Valuation 254
The integration plan 261
Conclusion 262
PARTIII: COLLECTING ANDPRESENTING THEDATA
12 Structuring and Planning 269
Understanding thequestion 269
Issue analysis 271
Collecting thedata 279
Dealingwith obstacles 290
Otherplanning tips 294
Conclusion 297
13 Interviewing 299
Questionnaire design 299
Tipsfor successful interviewing 312
Competitor interviewing 315
Otherforms of interviewing 318
Conclusion 321
14 Writing the Report 323
Startbyputting thereportincontext 323
Keep thestructurelogical 323
Give theanswerviaa logicalhierarchy of issues 324
Cover oneissue at atime 324
Group issuestomakeunderstanding easier 325
Writingstyle 329
Makesure individualcontributionsare consistent 336
Producean interimreport 336
Vendor CDDreports 336
Conclusion 337
viii Commercial Due Diligence
Appendix A Checklists 341
Checklist 1:CDD briefing 341
Checklist 2:A full CDDexercise 343
Checklist 3:Marketing 347
Checklist 4:Five Forces 351
Checklist 5:Identifying resourcesand capabilities 355
Checklist 6:Threats and opportunities 357
Checklist 7:Determining KPCs 358
Checklist 8:Commonly sought managementcompetencies 359
Checklist 9:Competency-based interviewing 361
Checklist 10: Samplequestions forcompetency-based interviews 362
Checklist 11: Things thatcan gowrong on CDDprojects 364
Appendix B Report Writing 365
Words andphrases tobeavoidedinreportwriting 365
Presenting numbers 367
Styleand reportwriting 389
Index 391
List of Tables
1.1 Contract analysisand salesforecasting 25
1.2 Whypast financial performance isnot agood guide tothefuture 28
2.1 Differenttypesof M&A andtheimplications for CDD 36
4.1 Thespectrum of industrystructures 81
4.2 Theattractiveness of thecompetitiveenvironment 95
4.3 Industry characteristics andtheirimplications forfuture profits 97
5.1 Occupationas thebasisfor socio-economic segmentation 104
6.1 Thepros andcons of a SWOTanalysis 119
6.2 Thescored SWOT 121
6.3 Tangible differentiation possibilities 129
6.4 Aligningbrand and consumer values 134
6.5 Varietiesof brand extension for amanufacturer of prams and children’s
carseats 137
6.6 Theconsequences of industryevolution 143
7.1 ObservingPorter’s FiveForces inpractice 150
7.2 KPCs, CSFsand KPIs forbicycles 152
8.1 Theoutputof a KPCinterview withmanagement 159
8.2 Measuringrelative valueperception 164
8.3 Relativevalueperception of apiece of software 165
8.4 Classifying customerneeds 166
8.5 Definingproduct price 167
8.6 Customer roles 167
8.7 Scoringthefour customer elements 168
8.8 Thefour basic salesapproaches 182
9.1 Characteristicsof successfulnew products 187
9.2 Alternativestrategies for exploiting innovationand relative risk/return 192
10.1 Structuringa 3-hour interview 216
10.2 Scoringindividual managerson each competency 225
10.3 Organizationculture andstrategy 229
10.4 Operatingversus innovatingorganizations 230