The past few years have seen several officially recognised "disasters", where the return on an investment has not shown itself to be as expected. Or as of that promised in the prospectus. Examples include Martin Gruppen, Genan, OW Bunker and possibly HeSa Light. But other less well known acquisitions have equally ended substantially poorer than expected.
Do there exist deficiencies or, a lack of expediency, in the process undertaken before the purchase? The professional capital funds can typically undertake a long and thorough lead up taking full advantage of their specially trained employees and hired specialists. They do not have, needless to say, the luxury of making mistakes. But they do occur. If rarely.
Private investors, businesses and pension holdings investing directly in businesses or at IPOs don't have the resources of capital funds, who can direct feasibility studies and base their decisions on prospectuses worked up by the IPOs bank in collaboration with lawyers, accountants, advice from engineering firms and management consultants.
Ordinary Due Diligence
As can be seen on the various websites of these advisors the purpose of a Due Dilligence is
"to collect and verify all information surrounding the business and give buyers/investors insight into the condition of the business for use during evaluation, purchasing negotiations and the possible ensuing take over process. The investigation normally covers finance, organisation, products, production, the environment, contracts/law, IT along with sales and distribution"
Under sales and distribution it is noted: "compilation of customers and products, registry of major customers, distribution channels, marketing etc".
Experience shows that the categories least brought to light in prospectuses and feasibility studies are customers and market conditions. Simultaneously, it can well be concluded that the determining factors for investment in a business are customer base and market conditions followed by the management's abilities and record in steering the company.
Market Due Diligence
The concept of Market Due Diligence as a sub-category in a Due Diligence is undervalued and downgraded in relation to the fact that customer base and market conditions are the absolute determining factor. We have, at Aalund, 25 years of experience in evaluating the customer and marketing side of companies. It is our experience that even a basic version of a Market Due Diligence, under which you interview:
- The company's 10 largest customers and/or a representative section of the customer base
- Lost/ Ex customers
- Non customers within the company's business sector (potential growth)
can affect the evaluation of the company markedly-and to a certain degree insure investors against misinformation.
But it is clear that a slightly more far reaching Market Due diligence, that investigates numerous determining market factors, will give greater investment security. In particular the less concrete the company's pursuance is and the more diffuse the customer base a solid Market Due Diligence will, by necessity, have to be more complicated.
Even with a Market Due Diligence, where you are actually out in the market (if possible anonymously) and interviewing in-depth " actual customer's decision makers" , you have to ensure that those charged with conducting this work have the experience, methods and competence necessary to conduct it. It should, also, be a demand at an IPO that those who carry out a Market Due Diligence have the proven integrity and are independent of the company as well as the managing bank that is carrying out the IPO.
In summation, as experience-based advice to businesses, pension holdings and banks working with IPOs : Invest in a reliable and independent Market Due Diligence report. It pays for itself and is in step with the current demands for proper care and assiduity.
Søren Secher Huvendick & John Aalund
Market & Customer Research