Pre-Deal M&A: Reinventing Operations Due Diligence

Rob Owen, Sarah Simmonds

Due diligence of a Target is often limited to revenue and assets, with the cost base treated to cursory year-on-year trend analysis. This often causes issues post-deal as assumptions related to synergies and cost savings are found to be inaccurate.

Sophisticated Buyers will commission Operations and IT due diligence, which is likely to include a review of staff numbers, locations, IT systems and the overall operating model. We believe the current approach to Operations and IT due diligence misses three key areas.

Factors affecting the operating cost base


The degree of cultural alignment between a Buyer and a Target will have a material impact on the ease (and therefore time and cost) of integration, retention of key staff and fulfilment of the acquirer’s business plan. We believe that culture is tangible and can be assessed pre-deal by looking at factors such as:

  1. The respect given to support functions by Senior Management, e.g. does Management seek input from Risk and HR? Do these functions act as enablers?
  2. The structure of operating costs as an indication of responsibility, e.g. are IT and premises costs allocated to individual departments or held centrally?
  3. The content of reporting, e.g. is Management Information sales or risk focussed? Do Board minutes indicate a similar focus to the acquirer’s?

If you are acquiring a Target to leave as a standalone business, reviewing these items will give insight into how complex it will be for the Target to adopt your business strategy.

Realising Potential – ‘what’s not there’

Due diligence exercises typically focus on analysing the data presented and therefore often overlook what is missing. Reports focused on the operations of a Target typically detail the number of locations where a company operates, staffing numbers and operating costs. But what about alternate strategies for growth? We believe the most useful due diligence reports will include the potential impact on EBITDA of areas such as:

  1. New geographies where existing processes, sales approach and the product would be successful
  2. Additional product launch opportunities
  3. Outsourcing opportunities and areas where further efficiencies may be gained

Due diligence needs to consider ‘what’s not there’ to support you in maximising the value of the transaction.

Standard practices – Timing

During a deal, standard practices are often adopted, particularly in relation to timings. At Alpha, we challenge these standard practices, here are two areas where we see things differently:

  1. ‘Announce all synergies at the point of deal’.

Alpha View: Synergies should be identified early during the due diligence process. However, synergies that are more complex to calculate could be announced after 6 or 12 months, or even after their delivery, following greater access to information. The market loves out-performance

  1. Complete integration planning between signing and close’

Alpha View: Integration planning at a high-level should be completed pre-signing, to allow findings to be included in the valuation model and requirements of the vendor included in the Sales and Purchase Agreement (SPA)

How Can Alpha Help?

Solutions Due Diligence: Alpha’s knowledge of the industry allows us to deliver a holistic due diligence approach which is tailored to each deal. Alpha takes relevant parts from each pre-deal due diligence (e.g. Operations, IT and Divesture Diligence) and creates a bespoke, holistic due diligence package for a given situation. Involving industry SMEs throughout the process allows for more accurate future cost-base forecasts and a more in-depth analysis of potential opportunities to enhance a Target’s business.

We are seeing an increased interest in this area from a number of our current clients and believe it will continue to be a hot topic in 2020. Alpha are responding to this trend by working with clients to begin, develop and deliver their approach to M&A. Get in touch to find out how Alpha could support you.

About the Author

Rob Owen, Sarah Simmonds

Rob is an M&A specialist within Alpha's M&A Practice. He works on transactions which will result in a significant change to the ongoing business, either as a result of an integration and delivery of synergies or as part of a divestiture and carve out. Rob has worked on over 50 transactions, including some of the largest asset management deals in the UK.

Sarah is a Manager at Alpha and is a member of both Alpha's M&A and ESG Practices. She has previously worked with clients across all stages of the M&A lifecycle, from pre-deal due diligence to Integration.