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Our in-house experience and practical knowledge makes us particularly well-suited to conducting pre-acquisition due diligence assignments, spotting key issues and reducing them to management friendly reports and assessments.
We've found that successful acquirers view our due diligence process as much more than an exercise in verifying data.
Deal making is glamorous; due diligence is not. That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value.
Although big companies often make a show of carefully analyzing the size and scope of a deal in question—assembling large teams and spending pots of money—the fact is, the momentum of the transaction is hard to resist once senior management has the target in its sights. Due diligence all too often becomes an exercise in verifying the target's financial statements rather than conducting a fair analysis of the deal's strategic logic and the acquirer's ability to realize value from it. Seldom does the process lead managers to kill potential acquisitions, even when the deals are deeply flawed.
What Ciricillo can do to improve due diligence?
Ciricillo Process:
- Go through the numbers deeply and thoroughly
- Put the broader, strategic rationale for acquisitions under the microscope.
- Look at the business case in its entirety, probing for strengths and weaknesses and searching for unreliable assumptions and other flaws in the logic.
- Take a highly disciplined and objective approach to the process
- Understanding what are we really buying?
- Understanding what is the target's stand-alone value?
- Identifying where are the synergies—and the skeletons?
- Knowing what's the walk-away price?
Here are just a few of the most common examples of financial trickery Ciricillo had identified:
- Stuffing distribution channels to inflate sales projections. For instance, a company may treat as market sales many of the products it sells to distributors—which may not represent recurring sales.
- Using overoptimistic projections to inflate the expected returns from investments in new technologies and other capital expenditures. A company might, for example, assume that a major uptick in its cross selling will enable it to recoup its large investment in customer relationship management software.
- Disguising the head count of cost centers by decentralizing functions so you never see the full picture. For instance, some companies scatter the marketing function among field offices and maintain just a coordinating crew at headquarters, which hides the true overhead.
- Treating recurring items as extraordinary costs to get them off the P&L. A company might, for example, use the restructuring of a sales network as a way to declare bad receivables as a onetime expense.
- Exaggerating a Web site's potential for being an effective, cheap sales channel.
- Underfunding capital expenditures or sales, general, and administrative costs in the periods leading up to a sale to make cash flow look healthier. For example, a manufacturer may decide to postpone its machine renewals a year or two so those figures won't be immediately visible in the books. But the manufacturer will overstate free cash flow—and possibly mislead the investor about how much regular capital a plant needs.
- Encouraging the sales force to boost sales while hiding costs. A company looking for a buyer might, for example, offer advantageous terms and conditions on postsale service to boost current sales. The product revenues will show up immediately in the P&L, but the lower profit margin on service revenues will not be apparent until much later.
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