What does a due diligence analyst do

Due diligence: definition and history of the precautionary risk assessment

If two companies merge, the merger must be planned. The Merger Integration Due Diligence examines all aspects that have an influence on it. Often one speaks of a merger after a merger Post merger integration - this takes place after the integration of one company into another. The due diligence check usually includes a precautionary risk assessment of the purchase object. In this case, however, one goes back to the original meaning of the term. With due care Both companies - buyer and seller - must be examined for similarities and differences. Different types of fusion also require different approaches when merging the two parties. These are the most common forms of corporate mergers:

  • Full acquisitions (Acquisition): One company swallows the other. The target company changes all processes and structures according to the buyer's specifications.
  • Participation: The owner of the target company changes, but structures are retained. In fact, there is no integration.
  • conservation: The target company remains largely autonomous. However, the buying company ultimately has the say. Financial structures should be integrated. This connection often exists between parent and subsidiary companies. According to German law, subsidiaries must be included in the parent company's consolidated financial statements.
  • symbiosis: This integration variant is very rare and works even more rarely. With so-called Mergers of Equals The merger of two companies often results in a new company. For example, Daimler-Benz and Chrysler merged to form Daimler Chrysler. Both original companies gave up their business and the new company Daimler Chrysler continued its work. In the case of symbiosis, the companies involved cut the integration measures to their own common goals to.

Precautionary planning makes a significant contribution to the success of corporate integration - but it is often neglected. However, inadequate integration and hasty purchase decisions often lead to a company's loss of value. Anyone who intends to buy a company usually also knows the following numbers: 40–70 percent of all mergers are considered unsuccessful.

This rather large range can be explained by the range of the term “unsuccessful”: the full one Bankrupt is far rarer than falling profits. It is therefore statistically unlikely that a company will have to file for bankruptcy immediately following a failed merger. Losses are likely, however.

Probably the best-known example of a merger with catastrophic consequences deliver the following once bitter but successful rivals: the Pennsylvania Railroad (PRR) and the New York Central Railroad (NYC). Both railroad companies operated railroads in the northeastern United States since the mid-19th century. The PRR was considered the largest railway company at the time and for a long time played a pioneering role in safe, efficient rail traffic. NYC operated some of the fastest and most legendary streamlined locomotives in US history - such as the "Super Hudson".

The two companies competed on the New York – Chicago route. When the automobile boom set in in the 1950s, the former competitors wanted to counter this trend with united forces. 1968 the Pennsylvania Railroad Company and the New York Central Railroad merged into one Merger of Equals to Penn Central Transportation Company together. The newly formed transportation company was the sixth largest company in the United States. Two years later declared Penn Central bankrupt. At the time, it was the largest bankruptcy in US history.

The current figures show that this story is repeated in certain respects: CEOs with too much self-confidence, according to a study by Ulrike Malmendier and Geoffrey Tate, are quick to conclude large-scale mergers with high risks. The stock value of these companies has deteriorated over time compared to the competition.

But there is also good news: thoughtful bosses of small and medium-sized companies are hardly prone to such wrong decisions.

If investors are only interested in making a quick profit by downsizing a company, a merger is definitely worthwhile for them. Managers and CEOs of a sold company also leave the company with severance payments after a successful handover. However, if the company is to generate profit in the long term, it needs more than a simple business plan. The new company management must understand both parts and their corporate cultures. She has to analyze the product and its appeal, its customers and the market.

This is where merger integration due diligence comes into play. Who not only conclude a short-term profitable deal, but grow long-term with a new company you should keep the following guidelines in mind:

  • If two companies grow together, new organizational structures will inevitably arise. Before new and old clash and complications arise, plan the organizational structures. Analyze the Working method and organization of the target company exactly. Maintain strengths and weed out weaknesses.
  • Mergers consume a lot of resources - both in monetary terms and in terms of personnel. Take the stock. Communicate with the staff. You can only achieve your integration goals with sufficient capacities and motivation on the part of those involved.
  • The new company needs a business plan and a target-oriented strategy. Make sure your measures are tailored to the target company's market and customers.
  • Review your integration planning. Calculate what time and financial resources the companies need. A plan B helps with possible bottlenecks.
  • An internal integration team with extensive competencies - and the necessary know-how - should monitor the integration and analyze whether the resources provided are suitable and sufficient for their respective tasks.