Operational DD in Investment Cases

Handling Deals and Investment cases are quite like handling Legal cases where you need to read through the prepared files in detail before you can meaningfully engage in a Q&A with the prospect or the transaction adviser. The background information needs to be very clear and haze-free. Items which do not meet the filter of the analytical lenses, need to be flagged with the reading and understanding of the gap or doubt.

Operational experts often tend to be more direct and hands-on. They often run to action as that is how operations generally work. Its sometimes painful for them to sit and analyse piles of reports and analysis before they can reach a core action point. They are hardwired by experience to take quick action based on what they know and believe as ‘inevitables’. The Investment experts like to read their action suggestions loudly from what their analysis projects.

There needs to be a good balance of these two approaches – Analysis & Experience.

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Post investment, Businesses are faced with either of the following challenges:

1. Leapfrog growth and ramp-up value creation

2. Turnaround and make the business sustainable (before growth)

Both these scenarios demand a thorough investigation into the Business processes and the surrounding business eco-system. This will reveal ‘what is possible’ and ‘how to get there’. There will be a certain degree of tentativeness in these findings, but its good for a first plan. Subsequent sessions will add further layers of clarity and fine-tuning

This Strategic due diligence output then needs to be supported with cash and non-cash resources to achieve the desired outcomes under 1 or 2 above.

So, you can already see some potential areas of early failure in the typical 100-day plan, drawn up post investment.

a) The management team takes longer to respond to the fresh ‘wakeup call’. They have heard too many earlier and lack the real steam to jump into the new fire suits.

b) The resource list is visited too many times to tweak and further re-tweak, because simply put the business ran out of resources pre-investment and effective new cash, people or other enablers are not readily available.

c) The Strategic due diligence is done half-heartedly or with mostly the same DNA of the past, which will fail it from being appropriate, correct or even desirable.

d) Post investment, avoiding bankruptcy, having a new lease of life or facing a high growth mandate, the management tends to list out far too many activities that it can possibly manage or should even look at from an immediate value-add perspective. This overburden creates undesirable burnout and it also takes away critical management oversight.

It is therefore critical for businesses to foresee these possible scenarios just prior to making any major investments into the business. There is a need to put in place a focal change team to take the transition phase very seriously and to keep them focused on key transition KPIs. This is obvious and routine to the M&A world. But the volumes of failure reinforce the view that the magnitude of the challenge is either not understood well or the engagement is insufficient.