What challenge(s) do our clients face?
How to confirm the investment thesis in the early stages of a deal, which is characterized by lack of information about the actual valuation of a target organization, and its potential value creation levers
Most M&A processes originate from a business case/investment thesis based on the value-creation potential of acquiring and/or merging businesses. There are multiple challenges facing organizations during the pre-deal stage:
- Analyzing the current and potential value of a target: confirming or not the investment thesis
- Defining Valuation parameters
- Setting concrete and realistic goals for the integration: Agreeing targets which will drive the integration timeline, investment, milestones and team
- Mapping risks: Identifying potential problem areas and preparing mitigation and contingency plans
- Aligning expectations between all parties: Reaching consensus on the deal and integration goals, both across and within organizations
These challenges are particularly amplified in the early stages of a deal, which in our experience is often characterized by:
- A lack of information available on the target organization and/or the industry
- Conflicting interests between the sell and buy sides
- Time pressure, driven both internally based on the organization’s targets, and externally, as a result of uncertainty around the competition’s strategy
How do we help?
Integration helps to confirm the value creation levers, challenging the investment thesis and reducing the uncertainty in the decision-making process by bringing an unbiased perspective, balance between desire and reality, and a tested methodology.
We can help our clients with:
- Strategic Due-Diligence: Evaluating and analyzing the target’s strategic positioning and coherence with the Investment Thesis, considering aspects like market growth overview and trends, competitive landscape analysis, growth potential of the target, cultural assessment and governance related challenges. Our objective here is to see how a target company can contribute to the overall Investment Thesis.
- Commercial Due-Diligence: Evaluate and analyze the target’s commercial and sales strategy considering aspects like consumer needs, commercial structure, client base, and topline performance. Our objective here is not only to identify opportunities for cost saving but also to expand net revenue.
- Operational Due-Diligence: Evaluate and analyze operational aspects like manufacturing, logistic and back-office processes and structure; with the objective of foreseeing challenges and risks for each area, identifying any need for investment in infrastructure, people and also systems to achieve the desired service level for our clients.
What are the benefits?
A thorough due diligence alleviates uncertainty and reduces risk. It can:
- Connect senior leadership to the reality: Understand expectations of your team vs. the deal context and target, to identify conflicts and reduce future frustration
- Improve accuracy of valuation through business/quantitative levers: Identify main aspects of the business that help to achieve the financial and strategic results planned in the investment thesis and / or business case, and estimate the benefits that it will bring to the new organization
- Improve accuracy of valuation through qualitative levers: Identify “soft” factors inside the organization which generate complexity in the post-merger integration phase, and impact capability and speed to generate value
- Reduce resource investment: Assess potential deal-breakers during due diligence, to improve efficiency in the evaluation process and accelerate decision making
- Improve visibility of risks and realistic action plans: Identify and measure business levers against the Investment Thesis target to assess potential conflicts, and set action plans with defined enablers and investment
How does it work?
Our methodology has been developed through our experience in over 60 M&A processes, in a range of sectors, geographies and levels of complexity.
Each Due Diligence Assessment is unique and can vary in terms of phases depending on the maturity of the deal and its objective. But in most cases, it can be divided into three main steps:
The value of an unbiased party between the sell side and buy side should not be underestimated during the due diligence phase. Through our clean team approach, we bring a neutral and technical perspective that reflects what is best for the business, even if it frustrates individual agendas and interests.
A Private Equity & Investments fund had a buy and build Strategy for the Food Service Logistic Industry, and needed to evaluate multiple acquisitions at the same time to initiate a new platform from scratch: organizing the operation, defining the organizational structure and management team, and developing a plug and play platform.
We helped the client to carry out a strategic, commercial and operational due diligence – identifying the main opportunities to leverage the organization’s growth – and a market scan – evaluating the growth perspectives and the organization’s possible expansion scenarios. Based on the buy and build strategy, they rapidly invested in one target. After this first acquisition, we helped them to confirm the investment thesis targets and assess a group of companies that they were considering for investment.
For the private equity fund: we confirmed the investment thesis targets, selection of the potential targets and provided visibility of the main risks of the strategy defined (commercial and operational issues), increasing their confidence on the thesis. The company started with zero and after 2 years had an income of over R$2 Bi /year.
For the Management Team and Board of the acquired organization, we helped to organize and define key questions to be evaluated during the acquisition process and clarified the need to prepare the teams for the multiple PMI processes.
A leading European beverage organization entered the Brazilian beverages market through the acquisition of a local player. The client had no prior knowledge about the market, and needed to understand the local competitive landscape, and route to market.
We started by completing a commercial pre-due diligence assessment of the prospect’s route to market capability, and developed an analysis to test if the volume forecast in the entry strategy business case could be achieved in the timeframe expected, based on the client data base. We identified the main gaps in the market, and further evaluated the route to market strategy and commercial structure, to understand the core strengths of the acquired organization, and their capability to cover the market gaps.
We concluded that their business case was feasible from a route to market perspective, with one major attention point flagged for the real due diligence (price deflation), for which we defined a clear action plan. Following this confirmation, we supported the client to detail the synergies and plan the integration, considering the action plans defined in the Due Diligence Phase.
An American Chocolate Manufacturer with a small presence in Brazil was looking to expand its operation via acquisitions. Considering that other leaders in the chocolate business were already owned by other multinationals, they identified a player that had a wider portfolio, playing in snacks beyond confectionary. The client asked Integration for support in evaluating the real chances of success from a possible merger.
One the project had been confirmed as aligned with the overall strategy, and approved by investors, we worked hand in hand with global M&A to develop extensive data analysis and simulations, interview local producers and conduct field visits, to ensure the recommendation was solid and the rationale clearly understood.
Through a detailed understanding of the target company value proposition, distribution channels, brand equity and profitability projections, our recommendation did not confirm the organization’s hypothesis. The deal was not approved, and the client took a different, more successful direction.
Our M&A approach adapts to industries of every sector – we serve industries going through an M&A process by themselves, and private equity organizations who have competed many before, working with many regional and international companies across Consumer Goods, Logistic Operators, Retail, Pharma Healthcare among others.
Our professionals have a developed understanding of market dynamics, best practices, and organizations’ strategic decisions across geographies, as well as industry segments. This allows us to bring robust and customized solutions to our clients in all M&A strategies and contexts.