STRATEGIC DUE DIIGENCE (DEFINITION)

Strategic due diligence is a critical component of deal analysis which investigates

the commercial attractiveness of a deal and its likelihood of achieving success.
Strategic due diligence centers on determining whether a deal’ s value is adequate,
realistic, and attainable. 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.
Booz & Company. September 28, 2006. Strategic Due Diligence: A Foundation for M&A Success. From
file:///C:/Users/hanna/Desktop/SDD/Strategic%20Due%20Diligence_%20A%20Foundation%20for
%20M&A%20Success.html

OBJECTIVE AND PURPOSE

In Strategic Due Diligence, the buying company evaluates the market in which
the target company exists. For instance, the buyer may interview the other company’s
current customers, assess its competitors, and perform a full analysis of the
assumptions behind the target company’s current business plan. It is done to determine
whether the business plan can hold up to the market’s realities.
Wenke, Marlene. March 2017. A Guide to Strategic Due Diligence. From https://www.docurex.com/en/a-
guide-to-strategic-due-diligence/

BENEFITS AND RISKS OF STRATEGIC DUE DILIGENCE TO THE BUSIENESS

ORGANIZATION
“The key to unlocking a deal’s full potential is a rigorous and comprehensive strategic
due diligence” – C. Speer, A. McBorrough & D. Hays
Late 1990s, marked the great strides of the art and cience of merger execution,
since then, a more prudent, systematic approach to mergers and acquisitions has
emerged, one of this is due diligence application. Companies have long focus their
attention on financial and legal aspects of the due diligence as mentioned above,
hoping that it would help them to reach success. Despite their effort, it seems that still it
is not enough to cover a due diligence scope and avoid a company to fail in the post
cquisition phase.
Josiane Nouboussi and Ndeye Diene Beuke enumerated on their thesis entitled
‘Due Diligence: Learn From The Past, But Look Toward The Future. A qualitative study
of how Strategic DD could be a way to increase M&A chances of success’ why do
business deal seems to fail despite of intensive preparation and execution. In a study it
is found that among the reason why some acquisition did not create value is the fact
that: 1) managers of the acquiring company did not understand the target company at
the time of the acquisition; 2) the acquirer imposed an inappropriate organizational
design on the target as part of the post-acquisition integration process. This highlights
the importance to know the target company in the pre-deal phase in order to assess in a
proper way the potential value created from the deal otherwise the outcomes will be
totally divergent from the expectations.
As what have been mentioned above the main idea is performing internal and
external inquiries by going far beyond financial due diligence aspect only. The company
through the external inquiry question himself on the future outcome the deal would
realize and the deal attractiveness and impact on customers. Through the internal
inquiry, the company assesses if it can with its internal resources realize the targeted
value and as well assesses its risks associated with different areas which will help him
to strategically draw its due diligence should one or more areas be relevant for the
success of the deal. Potential synergies and dis- synergies that could impact the deal’s
success are assessed and validated. Strategic due diligence can also identify potential
integration challenges and cultural frictions which can then be hedged with mitigation
tactics.
Nouboussi, Josiane & Beuke, Ndeye Diene. Semester 2008. Due Diligence: Learn From The Past, But
Look Toward The Future. A qualitative study of how Strategic DD could be a way to increase M&A
chances of success. From http://www.diva-portal.org/smash/get/diva2:142286/FULLTEXT01.pdf

Strategic Due Diligence is indeed a challenging task, there are many ways to veer off
course if careful attention is not given. Lists below are important action items should be
on focus:
1) Common Errors in Strategic Due Diligence
2) Incomplete analysis of the strategic determinants of value creation
3) Poor understanding of the competitiveness of the business
4) Inaccurate projections of revenue, cost, asset structure, and cash flow
5) Optimistic expectations of value improvement of the target company
6) Lack of stress-test of results
7) Strategic assessment disconnected from financial valuation
8) Overly optimistic synergy sizing
9) Inaccurate quantification of risk
10)Inaccurate quantification of the control premium
11)Over-valuation of the business
Great Prairie Group. July 2018. Why do Strategic Due Diligence Fail? From
https://greatprairiegroup.com/why-strategic-due-diligence-fail/
OPERATIONAL NATURE AND CHARACTERISTICS
Strategic due diligence differs from traditional due diligence in terms of its
operation. The former focus on the combined companies’ future. Its purpose is to
assess whether the acquisition will succeed, and beyond that, to identify specifically
what will need to be done in the post-merger integration to make the transaction a
success. Strategic due diligence usually involves a larger cast of players: financial,
legal, operation, IT, HR, and other key players as needed. It always makes use of a
wider array of information sources such as customers, competitors, joint venture
partners, key suppliers, former suppliers, and etc.
M. May, P. Anslinger & J.Jenk. 2002. Avoiding the perils of traditional due diligence. From https://imaa-
institute.org/docs/m&a/accenture_01_Avoiding_the_Perils_of_Traditional_Due_Diligence.pdf

SCOPE (AREAS COVERED) OF STRATEGIC DUE DILIGENCE

Strategic due diligence focuses on the external (commercial attractiveness) and internal
aspects of the target company. Commercial attractiveness pertains to customer and
market players. Internal aspect assess whether the target company is capable of
achieving the desired outcomes of the deal. This step involves looking at strategic,
operational capabilities, financial projections, as well as organizational culture Skills and
experience of the management team of the target also considered to determine the
likelihood that they will be successful in achieving desired outcomes.
C. Speer, A. McBorrough & D. Hays. March 2019. Strategic Due Diligence – The key to unlocking a
deal’s full potential. From https://weareogx.com/wp-content/uploads/2019/03/Strategic-Due-Diligence-
Whitepaper_OGx-Consulting_vF_March-2019.pdf

AUDIT POCEDURE OF STRATEGIC DUE DILIGENCE

It is paramount to perform due diligence before a merger or acquisition. A due
diligence report, with strategic due diligence, that shows comprehensive analysis of
anything before execution must be accomplished. As defined by Deloitte, due diligence
is the third step in the process of an M&A transaction. The M&A lifecycle is divided into
three parts namely pre-deal, pre-announcement and post announcement.
Pre-Deal
In this stage, the acquirer has not made a decision about going through a merger
or an acquisition. This stage has two steps:
M&A Strategy
In this step, the acquirer establishes a broad corporate-wide strategy in-order to embark
on the path of a merger or an acquisition. In this M&A targets are determined, portfolios
are reviewed, a list of potential acquisitions is prepared, and decision rights and
accountabilities are established.
Target Screening
This is the second step of M&A lifecycle. During an M&A transaction, the acquirer has a
portfolio of hundreds of companies to choose from. In target screening, the acquirer
brings this list down from hundreds to final few companies. Based on their business
models, financial valuation, potential growth prospects, etc. the acquirer will select these
final few.
Pre-announcement
This is the third step of M&A lifecycle, It follows the steps – M&A strategy and target
screening respectively, Here due diligence, strategic due diligence, is being conducted
and makes the due diligence report.
 Strategic Due Diligence Framework

Booz & Company. September 28, 2006. Strategic Due Diligence: A Foundation for M&A Success. From
file:///C:/Users/hanna/Desktop/SDD/Strategic%20Due%20Diligence_%20A%20Foundation%20for
%20M&A%20Success.html

Investment Thesis
Strategic due diligence begins with forming a clear understanding of the
investment thesis and objectives. Understanding these elements ensures all
subsequent analyses tie back to the overarching desired outcomes for the deal.
Critical questions that ensure alignment with objectives must be asked: what is
the strategic rationale for the deal? Exactly, how will the deal create value? Which are
the key questions that have to be answered?
Answers to the above questions help inform the strategic rationale for a deal.
This rationale is then broken down into component value drivers that are investigated
and pressure tested across multiple scenarios and throughout the ensuing market,
competitive, and internal analyses.
Market Analysis
Determining the commercial attractiveness of a deal begins with performing a
rigorous and data-driven market analysis. Market analysis centers on understanding the
customer, current and prospective. Customer demand drivers, trends, preferences and
jobs-to-be-done are ultimately what create a market opportunity. The analysis must also
consider how these trends or preferences are likely to shift over time. Thorough market
analysis also considers legislative, political, regulatory, economic, social, technological,
environmental, and legal trends that may impact demand and market size over time.
With customer and external market considerations understood, a data-driven
approach can now be applied to sizing the market. Total addressable market,
serviceable addressable market, and share of market become quantitative and
informative measures against which deal potential is evaluated. Differing scenarios
should be modeled and analyzed reflecting various market dynamics and outcomes.
These scenarios should also address the possibility of major market disruptions as well
as changes in market dynamics due to deal closure.
Competitive Analysis
The next critical step to assessing the commercial attractiveness of a deal is
performing a rigorous competitive analysis. Competitive analysis starts with identifying
all major and relevant competitors in the market. This may include prospective
competitors as some companies may be operating in adjacent markets and have the
ability to rapidly shift into the market of the target company. Once relevant competitors
have been identified, strategic due diligence looks at each of them closely to determine
the strengths and weaknesses of their respective strategies and execution capabilities.
In addition to a review of each key competitor in the market, it is important to
assess the overall competitive landscape using frameworks such models. Each of these
elements is critical to understand the competitive dynamics and risks within a market.
Finally, strategic due diligence considers what competitors may do in response to the
deal. It is not uncommon for other industry players to respond with strategic actions of
their own after a deal has been completed. An assessment of these potential actions is
key to predicting changes in the landscape and crafting response tactics. This improves
the reliability of the deal’s projected outcomes. Having assessed the commercial
attractiveness of the deal from a market and competitive perspective, the analysis shifts
inward to evaluate the target company’s capabilities and likelihood of achieving
success.
Internal Analysis
Once a clear view of the market and competitive landscape is obtained, the
diligence is ready to shift to arguably its most critical phase – internal analysis. Internal
analysis ultimately assesses whether the target company can effectively compete in the
market and competitive landscape and achieve the desired value in both the short- and
long-term. Operational capabilities, leadership strength, financial strength, and cultural
considerations are evaluated against best practices to determine likelihood of success.
Post-Announcement
Integration/ Separation Planning
In this stage, the acquirer combines and makes new operating models, integrates the
management, address people and culture issues, design organizational strategies,
conduct clean room analysis to front load synergy capture, and communications are
synergized.
Integration/ Separation Execution
In this final step, the acquirer implements all the plans made during the integration/
separation planning stage.
Chris Speer. Strategic Due Diligence: The Foundation For Deal Success. From https://cicerogroup.com/wp-
content/uploads/2019/08/StrategicDueDilligence-c01-2019-07-29.pdf

Deloitte. 2017. M&A due diligence workshop: 2017 Engineering and Construction Conference. From
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Real%20Estate/us-engineering-
construction-ma-due-diligence.pdf

DIFFERENT ACCOUNTING METHOD OPTIONS OF STRATGIC DUE DILIGENCE

Since Strategic due diligence is a holistic approach, accounting method used in
traditional due diligence is also applied in former.

FOLLOW UP WORK AFTER STRATEGIC DUE DILIGENCE

In post-acquisition audit internal audit should lead a review that focuses on the value
synergies achieved against targets set, and the associated root causes that resulted in
exceeding or falling short of transaction expectations.
Protiviti Inc. 2016. A Guide to Mergers and Acquisition: Frequently Asked Questions.
https://www.protiviti.com/sites/default/files/united_states/insights/guide-to-mergers-acquisitions-faqs-
protiviti.pdf