Sometimes a deal can succeed in spite of itself.
The situation
The chief executive officer of a large international engineering firm was anxious to do what he viewed was a strategic transaction. But when the deal team’s analysis of benefits and synergies did not tip the scale toward moving forward, the executive used a last minute "gut feel" to add to the deal’s expected cash flows.
Had this been a larger transaction, the board might not have allowed matters to proceed. But since the deal was relatively small for the company, the board gave the green light.
The issues
In terms of problems for the company, that was just the beginning. One of the issues uncovered by the review process was the fact that the group’s corporate development teams devised all of the deal assumptions. In other words, business units were being asked to "buy-in" after the fact.
Next, it was later learned that the board was unclear on the appropriate discount rate to use for different business units to evaluate cash flows. In addition, transaction costs were neither fully budgeted, nor comprehensively tracked.
As for due diligence, the in-house developed process was later deemed inadequate.
The result
As bad as it seems, owing to outstanding underlying fundamentals, the deal is indeed generating positive returns for the company. The gut feelings of the chief executive officer were, in retrospect, validated.
However, the deal is delivering 35% of the expected value.
Opportunity for improvement
With a more focused effort on the key drivers of value in the pre-deal stage, with a detailed plan and appropriate resources, the company could have realized significantly greater return for its acquisition efforts.
The company is now in a position to learn from past deals and capture even greater value from its future transactions.
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