Managing Business Risks During a Merger or Acquisition - Pharmaceutical Technology

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Managing Business Risks During a Merger or Acquisition
Getting the most value out of M&As requires proper upfront legwork.

Pharmaceutical Technology
Volume 35, Issue 10, pp. 174, 173

Due-diligence best practices

Any life-science company considering a merger or acquisition should consider the following five steps to ensure that its due-diligence process helps manage business risks and prevent value destruction.

Put the right people on the team. A life-sciences company typically has multiple locations, some in other countries, as well as complex supply-and-distribution operations. The time available to draw up an offer can be as short as two to three weeks. The due-diligence team therefore should be structured to quickly obtain real-world answers to fundamental questions. This means including experts who can look at limited data and draw reasonable conclusions about areas such as: manufacturing, product portfolios, supplier relationships, IT capabilities, R&D and engineering, marketing and sales, and environmental compliance. A quality assurance specialist cannot cover all this ground alone. Perhaps most important, the team needs a senior executive who has the power to champion the right answer for the deal, even when that answer is "no."

Consider the following example. A US company wanting to acquire a high-growth product line made a play for a successful company headquartered in Australia. The rewards matched the company's objectives: revenue from sales outside the US would jump from 15 to 40%. However, the risks would be just as great: registrations and patents would require global management, and the success of the venture depended on keeping the seller's key people and infrastructure. The-due-diligence team included the COO as well as senior people from manufacturing, finance, legal, quality assurance, business development, and R&D, and an independent consultant to question assumptions. In addition to working with a virtual data room, the team spent two days interviewing seven of the seller's top executives and one day touring the main production facility. The team included a senior executive who would be in charge of the postmerger integration crucial to future revenue and earnings. Because the due-diligence team had the right people, the process contributed significantly to the immediate and long-term success of the acquisition.

Ask the right questions. In many ways, due diligence is a detective's game: the analysts need to look at clues (often from only partial data) and solve the mystery by defining the business case for the merger or acquisition, identifying the ways each facility or function would contribute to (or detract from) the realization of the business benefits, and pinpointing risks to processes, functions, or the enterprise. Even companies that do a lot of deals are wise to treat each one as a new and unique experience.

Find weak spots and define fixes. The due-diligence team needs to address areas of risk, such as the costs and efforts required to harmonize operations, the timetable for fixing problems, and the investment needed for postmerger integration. For example, upgrading an acquired company's enterprise resource planning system would be expensive and resource-consuming; its costs should be acknowledged.

Use facts to negotiate. The financial decision makers want to know of any issue large enough to stop the deal. But even problems that are not dealbreakers could be used in negotiations. The due-diligence team needs to be prepared to talk to C-suite executives, bond-rating agencies, investment bankers, and the sellers about issues, potential solutions, a course of action and as its timing and estimated price tag.

Bring in the regulators early. The postdeal organization should inform FDA or other appropriate regulators of plans to fix recognized problems. Regulators know that M&As can create confusion and inconsistencies, and they look for them during inspections. Even if there are no problems, it is a good idea for the buyer to connect with regulators to help ensure a smooth transition. Due diligence is a strategy for risk management and return on investment. When done right, it helps ensure value creation in a merger or acquisition.

James W. Bedford is vice-president of Regulatory Compliance Associates,
. Mark Ehlert is president of 315 Ventures,


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