THE COMMERCIAL

DUE DILIGENCE IMPERATIVE

MERGERS &ACQUISITIONS

PAY-OFFOPTIMIZATION

Christophe Robinet

EXECUTIVE

SUMMARY

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M&As Pay-Off Optimization - The Commercial Due Diligence Imperative

The questions at stake In the M&A field, this book plays its part in answering three questions:1. Commercial due diligence... What is that? What is it for?2. What is the theory? What does literature say about it?3. How is it implemented in real business life? What is the practice?

What makes this book of interest M&As worldwide volume has globally increased since 2009, reaching US$ 2.33 trillion in 2013. However, challenges remain since typically half of M&As today achieve success (according to the most favorable analysis), to be compared to one third, fifteen to twenty years ago. The focus here is on the assessment of market-related risks during the pre-deal phase... a crucial contribution to fix the acquisition price.

After defining what commercial due diligence stands for, the book unveils a unique tool: MOSAICS, to easily structure market data or organize analytical tools. The MOSAICS acronym stands for:

Market Overview, Segmentation, Added Value, Insiders, Competitive Positioning and Strategic Positioning. MOSAICS articulates them at single segment level or at company level.

EXECUTIVE SUMMARY

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M&As Pay-Off Optimization - The Commercial Due Diligence Imperative

The book also features a meaningful analysis of the due diligence practice, with a comparison mostly on corporations and consultants.

It shows heterogeneity in the use and mastering of analytical tools, as well as disparity regarding internal resources and allocated time dedi-cated to commercial due diligence. It appears that acquirers requesting the most to implement commer-cial due diligence in the time-window of formal due diligence - are fi-nancials, namely private equity firms and investment banking (to some extent); corporations typically ‘’do their home work’’ way up-stream, while formulating their corporate strategy.

A SHOR T BOOK ABOUT COMMERCIAL DUE DIL IGENCE, I .E . STRATEGIC MARKE TING IN DEAL PREPARATION.

Due to their limited internal resources, financial-driven acquirers wil-ling to check any source of risks (including market-related risks) mainly rely on consultancy firms to proceed. Consultants are thus key players in commercial due diligence, also contributing to the improvement of analytical tools.As for corporate ventures and venture capitalists, they are not using extensive commercial due diligence because the early stage of the

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M&As Pay-Off Optimization - The Commercial Due Diligence Imperative

business to be acquired - namely start-ups - often renders some of the tools irrelevant.Indeed, the maturity of the business on target is an element that impacts the practice of commercial due diligence, as well as the nature of the offer, complexity of the market, distance to the acquirer’s current business or the form of the deal, to name a few.

Overall, the book pleads for giving commercial due diligence the pro-minence they deserve to enhance M&A pay-off.

Targeted audience

The primary audience of this book consists of professionals from the finance, corporate or consultancy arenas, looking to optimize pay-off. It is also of interest for education: professors, researchers or students of universities and business schools, willing to broaden their knowledge of strategic marketing. The testimonials on the fourth cover page represent each of these categories.

About the author

Chris Robinet currently operates as a consultant for investment funds, corporations’top management and entrepreneurs. Passionate about marketing, he also designs modules to be held in business schools or professional conferences. His track record is in corporate business development, product mana-gement and technology licensing of high-tech products and services in global B2B markets. He successfully led market diversification and has been instrumental in elaborating M&A and JV scenarii, supporting the decision-process of the Board of Directors (in corporations) and Inves-tors (for start-ups).

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M&As Pay-Off Optimization - The Commercial Due Diligence Imperative

I FOREWORD V HOW TO GET THE BEST OUT OF THIS BOOK IX AKNOWLEDGEMENTSXI TABLE OF CONTENTS XV LIST OF FIGURES AND TABLES

1. INTRODUCTION

2. KEY CONCEPTS TO FRAME THE RESEARCH

10 2.1 What mergers & acquisitions refer to 10 2.1.1 mergers & acquisitions general definition10 2.1.2 M&A, an industry by itself12 2.1.3 M&A, one of many means of business strategy13 2.2 Motivations and types of acquisitions13 2.2.1 drive for acquisitions and players involved15 2.2.2 motivation for strategic acquisition16 2.2.3 typology of acquisitions19 2.3 The process of acquisition 20 2.4 What does due diligence refer to 22 2.5 Scope and skills for due diligence24 2.6 Summing-up the research field

3 RESEARCH METHODOLOGY

28 3.1 Literature phase30 3.2 Field phase one: interviews 32 3.3 Field phase two: on-line questionnaire 34 3.4 Synthesis and discussion 35 3.5 Limitations and bias

4 COMMERCIAL DUE DILIGENCE IN LITERATURE38 4.1 Key principles for due diligence 38 4.1.1 consistency with corporate strategy38 4.1.2 search what you don’t know, validate what you know39 4.1.3 due diligence is more than ever critical

TABLE OF CONTENTS

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M&As Pay-Off Optimization - The Commercial Due Diligence Imperative

4 COMMERCIAL DUE DILIGENCE IN LITERATURE (continued) 41 4.2 Definition, perimeter and outcome of commercial due dil.41 4.2.1 legal authors… a risk perspective42 4.2.2 finance authors… quantitative financial analysis as panacea 43 4.2.3 key definition: what drives the target’s future44 4.2.4 perimeter of commercial due diligence 45 4.2.5 note on assessment of the management team 46 4.2.6 CDD concretely assesses risks & opportunities48 4.2.7 CDD provides critical input for the price negotiation49 4.3 Prerequisites: back to marketing fundamentals49 4.3.1 what marketing should be 50 4.3.2 distinction between market and industry 51 4.3.3 how life cycles impact strategy 53 4.3.4 value creation is about satisfying client needs 56 4.3.5 the art of segmentation 58 4.4 Applicable analytical tools in CDD 58 4.4.1 the challenge of an abundant literature 58 4.4.2 MOSAICS model as an overview 59 4.4.3 ensuring the correct use of tools61 4.4.4 tools related to (MO) market overview 62 4.4.5 tools related to (S1) segmentation and (A) added-value63 4.4.6 tools related to (I) insiders 64 4.4.7 tools related to (C) competitive positioning 65 4.4.8 tools related to (S2) strategic positioning 66 4.4.9 wrap-up 5. FIELD OBSERVATION70 5.1 Reminder on methodology 71 5.2 Categories of respondents 71 5.2.1 key discriminant: degree of involvement in due dil. 71 5.2.2 consultants 72 5.2.3 corporations 73 5.2.4 corporate ventures 73 5.2.5 other categories with financial drive 74 5.2.6 other participants 75 5.3 Tools implemented 84 5.4 Information sources and role of intuition 84 5.4.1 information sources 85 5.4.2 intuition and rationality

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M&As Pay-Off Optimization - The Commercial Due Diligence Imperative

6. OPEN DISCUSSION ON THE PRACTICE IN COMMERCIAL DUE DILIGENCE 90 6.1 An obvious heterogeneity 90 6.1.1 use and mastering of analytical tools 91 6.1.2 internal resources / skills available for CDD 93 6.1.3 allocated time 95 6.2 Elements leading to heterogeous practice 95 6.2.1 acquisition drive 97 6.2.2 management of the acquisition sequence 99 6.2.3 distance to current business (or to current biz model)100 6.2.4 degree of maturity 101 6.2.5 nature of offer 102 6.2.6 other elements 102 6.2.7 apparent necessity for CDD in the official due diligence time-window104 6.3 Consultancy firms as key players 104 6.3.1 market mapping (their clients) 106 6.3.2 industry mapping (their peers) 109 6.3.3 terminology used109 6.3.4 behavioral variations 111 6.3.5 secrecy management and involvement in advisory service

7. CONCLUSION

8. EXECUTIVE SUMMARY

R. REFERENCES132 I Books 134 II Scientific articles 135 III Reports and non-registered publications

A. ANNEXES

138 AtoI Examplesofanalyticaltools 147 JtoM Elementsofinvestigationphase153 N About the author

MERGERS & ACQUISITIONS

THE COMMERCIAL DUE DILIGENCE IMPERATIVE

DISTINCTION: ARFA PRIZE

‘’In this short book, Christophe Robinet provides the business world with a wake-up call as well as with an excellent practical tool to act on it. This book draws an meaningful analysis of commercial due diligence practice. It puts into perspective the MOSAICS tool box in terms of structuring market and strategic information.’’

‘‘The MOSAICS model Mr Robinet developed improves the readability and eases the validation of market data in deals. I recommend data-room providers to structure the set of market-related information according to this method.’’

”Robinet’s work is significant in understanding the strategic value of a deal. In many respects, it also emphasizes the value of networks and intangibles in the analysis of an acquisition. This contribution is a must read for all experts involved in PE and M&As.’’

This book is the updated version of an MBA thesis, for which the author was awarded the ARFA PRIZE 2012 in the Master’s Degree category, a yearly distinction by ARFA, the French Association of M&A Professionals.

“Commercial due diligence is key to establishing value in an acquisition, but in practice is often a poor relation to financial and legal due diligence. Christophe’s research is an important step in giving the commercial analysis the prominence it should have. Serious acquirers should take notice of what he has to say, whether they be strategic or financial buyers.”

- Prof.Drs.R.Sybren Tijmstra (NL)Professor in International Strategy and Management at IAE Aix-Marseille University

- Mr.Jonathan Marsh (FR)VP Legal Director M&A and Finance at TOTAL, Member of the Jury of the ARFA Prize 2012

- Mr.Olivier P. Hance (LU) International Business Attorney and HANCE Family Office Managing Partner

- Mr.Peter Howson (UK) Director of AMR INTERNATIONAL, Commercial Due Diligence Expert

pay-off optimizaTION

ISBN 978-2-3220-3630-1e-book version

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EXECUTIVE

SUMMARY

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