Merger and acquisition (M&A) activity in 2021 reached an all-time high of $5.9 trillion, with a record volume of more than 63,000 transactions – representing an annual increase of 64% and 24%, respectively. This competitive marketplace equates to added pressure – felt on both the buy and sell side – to ensure successful dealmaking. In Clarkston’s experience navigating M&As with clients in the consumer products and retail industries, we saw key common themes in successful transactions – from deal finding through industry and sector-specific commercial due diligence. Below, we unpack the importance of industry expertise for retail and consumer products due diligence.
Importance of Trusted Advisors in Deal Finding
Any successful M&A deal involves trusted advisors to help navigate deal finding, diligence, and execution – and it’s even more critical in this highly competitive marketplace.
It all begins with the deal thesis. What are the underlying drivers for a merger or acquisition? For those in the consumer products and retail industries, is it to acquire more advanced digital capabilities in support of consumer journeys? Does the deal thesis lie in the heart of direct-to-consumer (DTC) capabilities, in step with consumer expectations of fast/free delivery? Or, is it for growth through expansion into a new market or boosting market share by broadening distribution channels? A clear motive jumpstarts the target-finding process and increases the rate and probability of value realization.
The trusted advisor works alongside the buyer to align on the M&A motive and clearly articulate the deal thesis before embarking on deal-finding. To do this well, advisors must have deep industry and subject matter expertise to guide based on the organization’s strategic vision within the context of market and competitor dynamics. To find a target, are there opportunities to look beyond the knowns within the saturated market and potentially uncover hidden gems?
Leveraging Industry and Subject Matter Experts in Due Diligence
The current seller’s market places onus on the buyer to conduct its due diligence within an accelerated timeline. Rather than enumerating the many potential areas of concern and summarizing the mountains of target-provided documentation, we’ve seen success with a risk-based approach, leading with high-risk areas of focus, followed by a confirmatory due diligence that captures the depth of the potential red flags alongside a more comprehensive analysis of mid- to long-term risks. We also will often see specialized areas of focus within advisor groups.
As an example, for a recent consumer products acquisition, Clarkston’s due diligence team evaluated the target’s manufacturing and supply chain capabilities, while other teams assessed the tax and financial components of the deal. With the compression of the diligence timeline, the absence of major red flags in the initial diligence period allows room for early negotiations to take place as the confirmatory diligence activities continue in parallel.
In the earlier example, Clarkston Subject Matter Experts (SMEs) conducted an early site visit of target’s manufacturing and warehouse facilities and held interviews with the target’s operations team that revealed a strong foundation in operational capabilities. Our analysis provided the buyer with confidence to begin negotiations. In the confirmatory due diligence that ensued, the Clarkston team broadened the analysis and identified specific recommendations to be able to scale and operate successfully as a carveout. In addition to operations-specific recommendations, our team identified key target talent to consider for a smooth post-merger transition.
The criticality of industry and subject matter depth in dealmaking is further exemplified in a recent engagement where the Clarkston team partnered with a client looking to acquire a DTC fulfillment company. The Clarkston diligence team – comprised of consumer products, supply chain, and technology SMEs – examined the target’s fulfillment capabilities and the enabling technology stack compared to the buyer’s traditional B2B stack. The distinct capabilities required of B2C vs. B2B were at the core of the deal feasibility and likelihood of deal success and value realization.
Interestingly, for a B2B-focused client, the Clarkston diligence team worked with them on acquisitions in the retail space, relying on significant advisory needs related to Direct Store Delivery (DSD) capabilities as well as trade promotion investments.
In partnering with a private equity firm considering a deal in the food and beverage space, we saw that the heart of the deal relied on the price elasticity of a premium cookies brand. The Clarkston team conducted rapid tests and surveys while in diligence to ensure the brand had room in price anchored in brand prestige and value perception that was important to understand.
The ability to identify dealbreakers early on, within a condensed timeline, requires deep industry and subject matter knowledge to know where to look and what questions to ask. Additionally, there are a number of common pitfalls when operating within an accelerated timeline to be mindful of.
Compression of Due Diligence Timeline: Common Pitfalls
Environmental, Social, and Governance (ESG) considerations are often de-prioritized in a compressed due diligence timeline, creating potential blind spots for risks associated with the reputational, financial, and legal impacts of ESG issues. Particularly within consumer products and retail, the alignment of sustainable manufacturing and supply chain practices is an important consideration – at times for the sake of brand reputation and at others for direct impact to the buyer’s emission reduction targets.
Additionally, ESG diligence may uncover issues related to workplace diversity, inequity, or misconduct. The cost is typically higher to remediate these issues than to identify them early on in a deal. In addition to uncovering red flags, the ESG diligence provides insight into corporate culture that can serve as an important indicator of post-merger integration success. As seen with Microsoft’s acquisition of Activision, ESG issues could be an economic and PR nightmare, and one that requires transformative change to remediate.
Another topic that may fall low on the priority list but remains an important consideration is cyber security diligence. How is the target’s cyber compliance? Have there been any data breaches in the last five years? What protocols do they have in place to protect data within their network and endpoints? In addition to general good data practices, those in specific industries are obligated to protect sensitive data, such as consumer health information. Therefore, cybersecurity strength is not merely a nice-to-have, but truly table stakes for those in consumer-data intensive industries.
The competitive marketplace and the need for buyers to glean essential information within a tight timeline requires the support and collaboration of advisors along critical junctures within the M&A deal cycle. The ability for trusted advisors to identify deal-breakers early on allows for reduction in time, resources, and, perhaps most importantly, opportunity costs.
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