Magazine article Management Today

Giving Diligence Its Due

Magazine article Management Today

Giving Diligence Its Due

Article excerpt

Takeovers can fail because full research is neglected Any company that buys another is letting itself in for a long and expensive process of integration. What's more, there's a good chance it will not succeed. Numerous studies have shown that as many as 50% of all takeovers fail in the sense that performance of the combined businesses falls significantly short of expectations. A good number of these unproductive acquisitions are subsequently unwound. One reason is that businesses omit to give proper attention to commercial due diligence. Acquisitions are almost never completed without a process of financial due diligence. Legal and environmental investigations are also increasingly recognised as important in reducing risk. But a surprising number of executives are prepared to commit their companies without consciously studying the target's strengths and weaknesses where they matter most - in the market - with the aim of identifying problem areas and ensuring that there are no skeletons lurking in the cupboard. The process entails making discreet contact with customers, suppliers, competitors, and any others who may be in possession of useful information.

The classic example of neglect in this matter is Ferranti, which in 1987 made the mistake of acquiring International Signal & Control without validating the authenticity of certain claimed major contracts. The outcome was the demise, liquidation and break-up of a once highly respected British company. But the Ferranti case alerted many other companies to the danger.

The engineering group Beauford also suffered from ill-researched acquisitions, as the previous management secured businesses for paper - which helped to conceal realities that cash purchases might have exposed. Losses of 26 million [pounds] pre-tax have since been turned into profits and, in the wake of capital reorganisation, chief executive Edward Duke is ready to begin making acquisitions again. …

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