Increasing demands on commercial due diligence
21. May 2015
1. Where can a management consulting firm like Lansdowne Consulting provide the most input in corporate transactions?
The input of strategy consultancies such as Lansdowne takes place at numerous points in a transaction, starting with an initial evaluation of a potential investment (red-flag DD), through strategic or commercial due diligence (CDD), to post-acquisition implementation support for identified optimization potential. Our focus in a CDD is the evaluation of the company’s management plans or strategy, the assessment of potential risks and the identification of strategic and operational optimization potentials. This requires, among other things, a rapid penetration of the business model, as well as the products behind it, and national and international markets and competitors. For this purpose we tailor consulting teams (if necessary international) of very experienced consultants and if necessary industry experts or “executives” paired with long-time CDD know-how, methodology and benchmarks. Furthermore, we analyze the operational performance of the company in comparison to the competition and identify additional potentials that have not yet been recognized or realized by the management. At the end of the due diligence, a bankable report is provided to the investor (e.g. private equity, company or banks) and of course explained in detail. These results have a decisive influence on the acquisition decision and purchase price determination. — Our consulting services do not stop here, however, but we are also available to the customer for the operational implementation of identified potentials at target companies in Germany or internationally.
2. Which support is currently most frequently requested by your customers?
In addition to our traditional services of strategic and commercial due diligence, our German clients are currently more frequently requesting support at an earlier stage in the transaction process by preparing a red flag due diligence, which quickly provides an initial overview of the risks (so-called red flags) or potentials associated with the purchase of the target company. This helps investors with potentially risky investments to make an early decision regarding the continuation of the acquisition process. In addition to support in the actual transaction process, we are currently experiencing an increase in requests for operational optimization topics, especially after the acquisition of a company and successful mergers. These include topics such as purchasing optimization and the restructuring of support functions. This development also reflects key trends such as rising purchase prices and increased risk appetite in the private equity market, which require the rapid release of measurable internal optimization potential in order to achieve the required investor returns without burdening the company’s core business.
3. Have transactions in German-speaking countries become riskier?
We notice a clear trend that both the risk in transactions and the risk appetite of PE companies in the German market have increased over the last years. We see several reasons for this. — On the one hand, there is a boom on the demand side. Due to the currently very low interest rates and the resulting good financing conditions, there is a high level of liquidity in the private equity market, which leads to a growing number of players or funds and thus to ever higher investment volumes. On the other hand, more and more foreign financial and strategic investors are flocking to the attractive German market in search of good investments. On the supply side, strong demand is offset by a relatively small supply and high purchase price demands. However, the purchase price does not always reflect the true economic strength and competitiveness of the company. The already great export strength of German companies combined with a weak euro has led to relatively high corporate profits in recent years. However, especially in global competition, these are increasingly influenced by external factors and framework conditions, which are subject to high volatility, while the operational performance and actual individual competitiveness of the company are more difficult to quantify. As a result, this leads to riskier investments and a possible overvaluation of companies due to external, non-controllable factors. For this reason, we recommend subjecting a target company’s management plans to stress tests as part of due diligence to check their robustness to external factors.