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Can valuation frame the success of diligence and integration? Of course, it could, especially in a traditional approach where a deal closes without any integration planning. But in a modern and Agile M&A approach, it shouldn’t. Explaining the valuation model’s relationship with diligence and integration is Erik Levy, Group Head Corp Dev, and M&A at DMGT PLC.
“if you look at what goes into the integration plan, it’s everything that you find out in due diligence.” - Erik Levy
Three Artifacts of a Deal
According to Erik, every deal has three artifacts: The valuation model, Due diligence reports, and integration plan. All of these are living documents that are linked together. As you go deep into due diligence and discover more things, those information needs to be taken into account in your valuation model. At the same time, the integration plan should also be taken into consideration because that is where you will achieve your synergies.
Type of Valuation Model
There are typically two types of valuation; a pre LOI and a post LOI. Due to the limited amount of information in the initial stages of the deal, you should develop a high-level valuation model where the goal is to model out the target with your working hypothesis for business drivers.
As you get more information, typically post LOI, you need to have a more detailed valuation model with revenues modeled out at the product, product market, customer segment level, and volume price-based model.
Keys to Success
To increase your chances of success, start your integration planning the day you start due diligence. It’s also a good idea to Involve the diligence team in the integration planning process.
Also, ownership and accountability are crucial. Someone from the corp dev or in finance needs to own the technical aspect of the valuation model. Simultaneously, the CEO or the CFO needs to own the assumptions that go into the model. More importantly, the integration lead will take ownership of the integration plan.
Lastly, all the teams that did the valuation model, due diligence reports, and integration plan need to be in constant communication with each other to know exactly what everyone else is doing.
Erik says that there are many reasons why deals fail, but it is never about someone overpaying for a deal. The biggest contributing factor of failed deals is the lack of integration planning or poor execution of the integration plan.