An M&A transaction between a buyer and a seller may be driven by a variety of business reasons, including:
- Increasing Shareholder Value/Return-On-Investment (ROI)
- Expanding Market Share Through Sector/Industry/Domain Leadership
- Extending Geographic Coverage Regionally/Internationally
- Improving Core Competencies with Established Solution Offerings
- Creating New Specialization Areas for Differentiation
In theory, the value of the combined entity formed by the transaction should be greater than the summed values of the buyer and seller individually.
Prior to the 2008 financial crisis in the United States, the global M&A business climate was dynamic. While the number and deal size of M&A transactions rapidly increased worldwide through the peak year of 2007, a trend that re-emerged in 2014 and continues today, the derived business value of the combined entities, when measured after the integration of the buyers and sellers, often did not meet expectations:
“82% of all M&A transactions fail to drive value.”
“50% of M&A transactions erode shareholder value.”
McKinsey & Company
“Revenue growth is found to decline post-merger for both the target and the acquiring firm in a majority of cases.”
Federal Trade Commission
So, in practice, “1 + 1 < 2” much of the time. This is known as “the outcome problem.” It seems as if every month you read about one of these failures in the press.
The current M&A deal paradigm may be characterized as having a deal team/transaction-focused “mindset” (i.e., typically the buyer uses the due diligence findings to influence valuation and subsequent negotiations in order to close the deal with the seller as quickly as possible) and which uses a general-purpose/process-driven software “toolset” to conduct the transaction (i.e., typically the buyer automates definable processes wherever and whenever possible). There are many limitations attributed to this outdated paradigm, and the most critical problems arising from it include bad post-transaction outcomes, uncompetitive valuations, and disjointed transaction workflows.
DiliVer has invented a new M&A deal paradigm that introduces a combined entity/outcome-focused mindset and an industry-specific/data-driven software toolset to overcome the limitations caused by the current paradigm. This new paradigm is the basis of our provisional patent for a “FinTech M&A Due Diligence Framework.” The first part of the patent describes the mindset framework and the second part describes the toolset framework.
DiliVer’s space in the global marketplace as an enterprise may be defined in terms of its primary market segments, as follows:
- Sector: Private/Commercial
- Sub-Sector: For-Profit
- Industry: Information Technology (IT)
- Sub-Industry: Financial Technology (FinTech)
- Domain: FinTech M&A
The FinTech sub-industry refers to two different types of IT customer solutions. The first type of solution includes general-purpose application software product categories of a financial nature, such as enterprise resource planning (ERP), accounting/general ledger, payroll, expense management, tax preparation, and payment gateways. These financial packages are widely used across many industries.
The second type of solution includes domain-specific application software product categories used primarily by enterprises in the financial services industry, which includes five popular domains—banking, insurance, mortgage, wealth management, and M&A (a.k.a. capital markets), which is DiliVer’s competitive niche. M&A is broadly defined to include financial and strategic business transaction-related initiatives, including variants such as acquisitions, mergers, initial public offerings (IPOs), joint ventures, leveraged buyouts, capital raises/fundraisings, refinancings, divestitures, bankruptcies, and restructurings.
Within the M&A community, popular financial enterprises involved in transactions include angel groups, family offices, venture capital (VC) firms, private equity (PE) firms, investment banks (IBs), hedge funds, and their buy-side/sell-side intermediaries. Also included at times are enterprises in other industries that participate in strategic transactions—on the buy side via internal corporate development (CorpDev) departments and post merger integration (PMI) project teams and on the sell side via market positioning/business excellence framework initiatives.
The enterprises involved in financial and strategic M&A transactions commonly use a variety of application software products with the following M&A domain-specific categories to assist with conducting their transactions:
• Virtual Data Room (VDR)
• Generic File Sharing (GFS)
• Enterprise M&A/Workflow (EMA)
• Deal Sourcing Platform (DSP)
• Scored Due Diligence (SDD) [**New—via DiliVer**]
• Market Business Intelligence (MBI)
• Business Plan Generator (BPG)
• Business Valuation Calculator (BVC)
• Miscellaneous Commercial-Off-The-Shelf (COTS) Packages Customized to Automate Standard Pre-Transaction/Transaction/Post-Transaction Processes (e.g., Office Suites, Project Management, Document Management, Business Process Management (BPM), Customer Relationship Management (CRM))
Other than the EMA workflow/process automation applications and the generic COTS applications (which, in theory, can automate any service/process), the new DiliVer SDD category is the only type of FinTech M&A software that spans the entire M&A transaction life cycle—and it does this both on the buy side and sell side, and with industry-specific (i.e., domain-verticalized) and data-driven (i.e., scorecard-powered) content. This is a critical differentiator for us in being able to agnostically interface to or integrate with any or all of the other categories.
DiliVer’s Transaction Life-Cycle Process Model is an M&A mindset-level framework that uses a three-part outcome optimization approach to provide customers with due diligence-related solutions before (i.e., positioning), during (i.e., dealmaking), and after (i.e., integrating) the M&A transaction.
In the positioning processes, DiliVer’s software focuses on the buyer and seller potentially comprising a deal team each justifying proceeding with the M&A transaction via a business case that includes the complementary mapping of core competencies and specialization areas.
In the dealmaking processes, our software focuses on the buyer and seller examining preliminary due diligence (Round 1) and confirmatory due diligence (Round 2) materials and then substantiating compliance with all of their respective transaction criteria to uncover value propositions, synergies, and quality/risk conditions that could affect outcome success.
In the integrating processes, our software focuses on the buyer and seller managing the steps needed to transition the relevant assets from the seller to the buyer; and then planning how to optimize the performance and growth potential of the combined entity over time.
DiliVer’s Enterprise Performance and Growth (EP&G) Data Model is an M&A toolset-level framework that represents an enterprise in terms of its aggregated internal resources (potentially six of them) and interfaces to external entities (potentially eight of them). Collectively, these 14 resource and interface classifications provide visibility into and measurability of the enterprise’s current performance as well as future growth potential so that its long-term value can be optimized.
The current M&A due diligence paradigm has relied on the terribly outdated, unstructured “due diligence checklist” as the preferred facilitation tool for a buyer to learn as much as possible about a seller before completing a transaction. DiliVer believes that having a checklist is much better than not having one at all; having a good checklist is certainly better than having a bad one; but that converting your checklist into a metrics-based DiliVer EP&G Scorecard is the very best scenario to help executives make better business decisions about transactions.
The enterprise performance model’s resources and interfaces may be used to create two types of EP&G Scorecards: (1) Buyer (External Assessment) Scorecards, which use resources/interfaces as appraisal categories; and (2) Seller (Internal Assessment) Scorecards, which use resources/interfaces as strategic goals. Each EP&G Scorecard aggregates (at Tier 1) the 14 Tier 2 resource/interface scorecards with all of the due diligence questions, answers, and measurements below it that represent the respective buyer or seller deal thesis. For each Tier 2 scorecard, user-defined sub-classifications may be used to group related due diligence questions, answers, and measurements for story-telling communications purposes. Think of the EP&G Scorecard as the window into an enterprise’s performance data, and realize that this standardized data can be used to compare deals.