Strategic Due Diligence

What exactly is strategic due diligence?

Whereas financial and legal due diligence ascertain the potential value of a deal and concern buying the company “at the right price,” Strategic Due Diligence explores whether that potential is realistic(however luring). It tests the strategic rationale behind a proposed transaction with two broad questions. Is the deal commercially attractive? And are we capable of realizing the targeted value? The first question requires external inquiry; the second demands an internal focus. Each question partially informs the other, reinforcing an inquiry that thoroughly plumbs the wisdom of the deal.

Looking at all, strategic due diligence ensures that no two transactions are treated in the same way; each deal has its own value drivers, and thus the composition of each due diligence team must change. Executives should determine which areas of the organization will produce value in the merger, and draw members of the due diligence team from those areas accordingly. Strategic due diligence counterbalances the danger of institutionalizing and replicating a diligence capability ill-fitted for the task at hand. Companies must tailor their process to the issues and potential integration challenges of each specific deal.

When analyzing a business be it for investment, acquisition, merger, or as part of an existing group or holding looking at historic and current trading performance is relatively easy.  But what about looking further into the future, what are the strategic issues ahead.  What are the risks of significant demand or supply changes what is the chance of new technological or regulatory change, or the deployment of new business models and market propositions which could have a major impact on the business in question?

Elements of STRATEGIC DUE DILIGENCE :

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Market demand analysis, drivers, trends and implications
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Competitive landscape analysis, trends
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Comparative Value Chain Analysis
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Comparative Competitive, Strategic and Operational performance assessment
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Operational Model dependencies

Technological, regulatory environment risk assessment
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Market Entry barriers and likelihood of new entrants or substitutes
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Strategy Dependency Mapping and risk assessment

Strategic due diligence thus adds an important deal-screening filter. After all, executives must be convinced not only that the potential deal value justifies the significant investment being made, but also that the business is truly capable of realizing this value. Indeed, a sober strategic due diligence evaluation should help set the purchase price. The buyer should demand a price that is consistent with the level of integration risk uncovered and be willing to walk away if that price isn’t met.