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Four Key Themes in Private Equity for 2017: Part Four, An Increase in Pre-acquisition Operational Due Diligence of Potential Acquisition Targets

The due diligence of the past is no longer sufficient

With record amounts of cash available for deployment and a rising population of portfolio companies preparing for exit, PE executives are becoming increasingly aware that the due diligence practices of the past may not be fit for purpose. In response, PE firms have been performing different forms of due diligence prior to bidding on acquisition targets to help better understand the inner workings of the targets and forecast future performance. 

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It's time for a fresh approach

In our experience working with PE Sponsors, successful M&A and carve-outs start with a full understanding of historical results and a realistic evaluation of projected operational improvements and their expected financial impact. One of the major weaknesses of traditional forms of due diligence is that they often fail to recognize the inefficiencies and savings opportunities that may be trapped within a company's supply chain and operations. This is because due diligence often focuses on the commercial aspects of the target company such as market size, competition, industry dynamics, etc., or on the financials, or specific products.  

What we have seen in 2017, is that operational due diligence -- i.e., the analysis of a company's supply chain and operations spanning financial performance, organizational design, processes & procedures, effectiveness with suppliers and customers, is becoming essential to PE firms. Most importantly, operational due diligence is performed to identify and size potential operating improvements within the target company that could lead to future value creation. To maximize ROI, value must be added through operational improvement while minimizing risks and reducing lead times, inventory and waste.

Why PE firms should perform operational due diligence

A comprehensive operational due diligence provides vital information to help:

  • Identify and size supply chain & operations savings and improvement opportunities
  • Have the confidence to increase bidding competitiveness relative to other PE firms vying for the same target company
  • Significantly reduce acquisition risk and accelerate time-to-value-creation

Operational due diligence in action

An example of how this works in practice is our recent work for a PE client that had entered into a competitive acquisition process to take a publicly-traded audio and technology consumer products company private. Maine Pointe was brought in early for the operational due diligence to help identify and size potential opportunities in the supply chain for value creation. The information we provided gave the client the analytical insights to raise their investment commitment and ultimately acquire the company successfully.

Post-deal, the PE firm asked Maine Pointe to conduct an in-depth analysis and work with the CEO to help realize the opportunities previously identified in both procurement and logistics.

A proven three-step approach  

To provide further insight into how operational due diligence can help drive value, reduce risk and provide confidence during the acqusition stage, Maine Pointe's three-step approach is outlined below: 

1. In-depth assessments of the target company's functional and departmental processes in the following areas:

  • Procurement (both direct and indirect materials)
  • Logistics (inbound, outbound, footprint, warehousing & inventory)
  • Operations (productivity, utilization, OEE, waste etc.)
  • SG&A (including finance, accounting, HR)
  • Working capital (releasing cash) 

2. Identify and quantify feasible EBITDA improvements as well as working capital risks and opportunities in order to create an actionable implementation plan with emphasis on actions to take in the first 100-300 days:

  • Develop a road map and timeline for projected benefits, such as reducing working capital and generating cash flow
  • Define a proposal for engagement to seize outlined opportunities ranging from 3.5:1 to 12:1 ROI, supported by a 100% engagement fee guarantee based on annualized savings

3.Through the lens of Total Value Optimization™, Maine Pointe is able to readily assess current capabilities and determine performance improvement opportunities across all elements of the supply chain & operations .

Prepare for the year ahead 

If predictions are to be believed, global M&A activity is set to increase in Q1 of 2018 with deal making supported by the gradual pick up in the global economy. The Intralinks Deal Flow Predictor, a predictor of future mergers and acquisitions (M&A) announcements, forecasts that the number of worldwide announced M&A deals in Q1 2018 will increase by around 2% compared to Q1 2017.

Forward-looking firms can stay ahead of the curve by changing the way they perform due diligence. This derisks the acquisition decision, with comprehensive insights on specific actions that can be  taken on the operating side of the business equation immediately. PE sponsors have a detailed road-map, that is additive to the 100-day plan, to drive rapid cash release, accelerated gross margin expansion and substantive EBITDA improvement. Ultimately transforming the target company's supply chain into a competitive weapon to achieve market advantage.

If you would like to learn more about how Maine Pointe's TVO approach to operational due diligence can help you identify and size potential supply chain opportunities in your acquisition targets, contact our PE experts for a no-obligation chat.

About Us

Maine Pointe is a global implementation-focused consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in both EBITDA and cash across their procurement, logistics and operations to enable growth. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the buy-make-move-fulfill supply chain to deliver the greatest value to customers and investors at the lowest cost to business. We call this Total Value Optimization (TVO)™.

Maine Pointe's engagements are results-driven and deliver between 3.5:1-12:1 ROI. We are so confident in our work and our processes that we provide a unique 100% guarantee of engagement fees based on annualized savings.

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