Amol Adlakha | General Manager – Strategy & Operations | Maier+Vidorno

First published in M+V’s India Insight in June 2013

Due Diligence in India, is the key activity in Mergers & Acquisitions (M&A), carried out by the buyer to determine a purchase price, determine areas of value creation and minimize risks. In any merger, acquirers do everything in their capacity to determine the synergies that may come from sharing of capabilities, economies of scale and implementation of best practices. But, however lucrative the synergies may seem, acquirers should evaluate all possible aspects in detail before the transaction happens.

It is a well known problem that many times when companies merge, either the expected value creation doesn’t happen or acquirers fail to benefit from it. Also, more & more acquirers are feeling that traditional Financial Due Diligence offers limited or no insight when it comes to estimating real ground level synergies and that errors in estimating the value creation are leading to undesired results. In order to assess the real value creation and synergies, a number of acquirers are also performing Operations Due Diligence in India (ODD) to study the target’s operations in detail, in order to determine what kind of investments would be required after buying the company – this gives them a point for negotiating the prices during discussion.

However, foreign buyers in India are faced with a situation where they have limited data about the target. Targets hesitate to disclose any information to their employees or business partners – resulting in limited or no access to target companies’ managers, workforce & capabilities, supplier network, channel partners and customers. This acute lack of information sometime leads to poor assessment of synergies and misleading targets.

To address these challenges, M+V has used its extensive experience in managing operations to carry out ODD on behalf of its clients in India. In 2012, M+V carried out complete ODD in a € 110 million deal where a Swiss group acquired the majority stake in a leading Indian manufacturer in road construction equipment industry. The whole exercise was carried out in 10 weeks. To begin with, the team carried out site-visits and developed an in-depth understanding of the key objectives; this was followed by submission of data requests and detailed understanding of target’s capabilities in Sales, Marketing and Production, Supply Chain & Procurement, Quality, HR and IT. This was carried out through value stream analysis, detailed interviews and onsite visits.

A holistic look at the operational impact on the business, combined with visits to end customers, helped in validating many areas of concern. Assessments regarding capabilities – product development skills, export to neighboring countries, low-cost production, post-merger capital expenditure, environmental concerns – were helpful in charting out action plans for realizing the benefits from synergies.

In another project, the M+V team discovered that the target purchased materials from vendors by paying exorbitant amounts and there was not even a quality check on the incoming material. It turned out that the vendor company was run by a relative of the owner of the target company and therefore, the management kept quiet on the issue. This would not have been discovered by a Financial Due Diligence – only the Operations Due Diligence avoided a disaster from the buyers’ perspective. The team faced the challenge of gathering hard-to-obtain data and doing an in-depth analysis in a short-period of time. M+V’s knowhow of the local language/ culture, expertise in managing operations and a supportive network combined with detailed review from buyers experienced management helped in managing the exercise smoothly. The benefits gained from the ODD were worth the extra effort and helped in making the right decisions during and after the merger.