Marketing Due Diligence:
Improving the odds of M&A success by
asking new questions
Another in a series of white papers for Private Equity Professionals
Summary: This paper makes the case for a strong marketing component in the due diligence
process, to increase the chances of a transaction that builds value by uncovering revenue
enhancing strategies and opportunities. To do so requires seasoned, independent marketing
due diligence advisors who ask questions that traditional due diligence advisors might not ask
and who can interpret a wide range of answers and marketing documents. The primary
example concerns a family-owned business in consumer package goods that doesn’t fit the
normal business/marketing mold.
Many people outside of the consumer package goods business would be surprised to
learn that the failure rate for new products is generally agreed to be over 92%. Year in
and year out, more than 10,000 new products are introduced and every year more than
10,000 are pulled off the shelves and tossed in the dustbin of rejected concepts. What’s
that loud flushing sound?
A great many of the deceased are “me too” copies of successful brands. Others are
slightly tweaked revisions of existing products that have been given minor changes or
enhancements consumers really don’t want or need. Still others are simply terrible ideas
that see the light of day because some corporate godfather issued an edict, or “group
think” shanghaied the development process and no brave soul had the courage to sound
But there is another industry where the batting average is almost as poor … and for
many of the same reasons: mergers & acquisitions.
Many in the M&A community believe the failure rate exceeds 3 out of 4 and the
frequently cited KPMG study puts failures at 83%. Frankly we found this surprising so we
dug a little deeper.
Most agree that a merger or acquisition is deemed unsuccessful when it fails to increase
shareholder value. The honeymoon or grace period is generally 4 to 5 years during
which the combined entity has time to realize the anticipated synergies as well as
execute its integration plan. But only 1 in 8 succeed in increasing the shareholder value
of the combined entity. Even if shareholder value has stayed the same, one has to ask,
“what was the point?” A lot of time and money was expended and the ball wasn’t moved
down the field.
There is a growing body of work both here and in the UK that is tackling the issue and
identifying the reasons for failure. Several recent studies have pointed the finger at a
primary culprit: the lack of a marketing perspective in the due diligence effort. There are
things about a company and its brands that the balance sheet doesn’t reveal. It cannot
answer questions such as:
What is the acquisition target’s relationship with its customer/consumer base?
How well do they really know them?
How skillful are they in reaching them and persuading them to buy the brand?
How long can they hold on to them and how often do they have to replace them?
What makes this brand preferred over its competitors?
There are hundreds more potential questions covering all aspects of the brand and how
it is sent to market. And taken together they give the acquirer a chance to see just how
good a marketer the target is, the level of skill and the quality of the talent. They begin to
identify growth or revenue enhancement opportunities that should be the ultimate
objective of the M&A activity. (If growth isn’t an objective we have to ask why the
acquisition was pursued in the first place.)
Unfortunately, none of the answers are found in the financials. And skilled lawyers and
talented accountants often don’t know the right questions to ask or how to interpret the
“marketing speak” responses they get. In this arena it literally takes one to know one. Or
correctly it takes an experienced one to know one. It takes years to acquire the
knowledge and the scars, not just a semester or two of Marketing 101.
Perhaps an example is in order.
We know of a family-owned company that will probably be in play sometime in the next 3
years. It is a very successful enterprise with a product that created an entire grocery
category and is still the leading national brand.
The company has always been debt–free. Or at least it was until a new plant was built
and the overruns drove them to the bankers’ doorstep. (But that is an entirely different
story for another day.)
The marketing and sales function is modest and short staffed even in light of the fact that
they have huge national customers such as Wal-Mart.
In the next couple of years it is highly likely the family will decide to sell, and someone
will make an offer, perform a traditional due diligence effort, close the deal, reduce staff
and budgets to cut costs and completely miss the point.
If they don’t ask the right questions during due diligence or post-deal integration, they
will miss an enormous opportunity or unwittingly set in motion events that will wither the
intrinsic value of the business.
So just what is the magnitude of the opportunity this company might have in store for the
marketing-savvy buyer? It may be growth, significant growth. Growth measured in
multiples not in percentages.
In spite of sales approaching $100 million this brand has miniscule levels of unaided
awareness among consumers, meaning it is not top of mind with a significant number of
consumers. In fact, its aided (read that prompted) awareness numbers are not much
higher. Increases in these numbers will yield dramatic growth in sales and profit.
And it will do so quickly. The brand has a significant amount of “headroom” or potential
to grow its user universe.
Why won’t a traditional due diligence effort unlock the treasure chest? First off, it is
possible no one will ask what consumer awareness levels are. Such questions don’t
often appear on a traditional due diligence checklist. If someone does ask the question,
the response will probably be “they are high” which will be an unintentional
misrepresentation of the facts based on nothing more than a few focus groups. The
company has never run legitimate, quantifiable consumer research. No awareness
benchmark. No awareness tracking. Almost the entire marketing effort is seat of the
pants and planning-by-anecdote is the order of the day. Heck, they didn’t even bother to
buy retail scanner data until 36 months ago!
These very low levels of both aided and unaided awareness are not just among the
general consumer audience -- it is true among users of the brand. Even its most loyal
consumers often refer to the brand by the color and shape of its packaging and not the
brand name. As a result, there is an enormous audience of new triers and occasional
repeat buyers that can be tapped with a minimal but consistent marketing effort. The
initial post-deal work should not be cost cutting, but brand expanding. Small amounts of
real consumer advertising will drive awareness efficiently and the resulting trial and
increased purchase frequency will yield immediate bottom line results.
We say “real” consumer advertising because past efforts have been an inconsistent
jumble of short-lived messages. The media plan has been “hit or miss” and usually
limited to ½ page FSI coupon ads in the wildly cluttered Sunday
newspaper. A non-marketer hearing that 35 million ads appear 4
Book Club Recommendation
times a year may take the answer at face value and think this is
If you haven’t read it yet, we
a serious effort. A seasoned marketer will see the plan for what
highly recommend Robert F.
it is: a promotion tool designed to whip up a broker sales force.
Bruner’s book Deals from Hell,
Ironically, it is a sales force experienced enough to know it will
published last year. It is a great
read with powerful insights.
be an ineffective consumer effort. A non-marketer may see the
resulting low coupon redemption rates as a blessing: low
It is amazing how so many deals
redemption means low out of pocket cost. A marketer will see it
assume a life of their own and no
as a warning: low redemption means low visibility. (There’s that
one steps up to put their foot on
flushing sound again!)
the brake and shout – “This is
So why will increasing marketing investment yield better results
than cutting it out? The limited user universe is wild about the
Just might help avoid the next
product. They seek it out. They share it with those they care
about. They keep coming back for more. Pretty rarified air for a
grocery store product. The opportunity for some acquirer may not be unlike having the
chance to buy Ben & Jerry’s in the late 1980’s. Among its loyal consumer base, this
brand is approaching the “consumer monopoly” that Warren Buffet often speaks about.1
Imagine being able to easily attract hundreds of thousands just like them.
But all is not rosy. And an unbiased marketing perspective during the due diligence effort
will reveal potential hazards.
It is quite likely the acquirer may be someone in a similar grocery category who will
believe that all they need do is fold the brand into their existing portfolio, sales force and
distribution channel. And doing so may prove to be a disaster because 1) this brand is
distributed differently than its primary competitors, 2) it is authorized and purchased by a
different buyer within the grocery chain, and 3) it occupies an in-store location separate
from the rest of its category. All of these anomalies are reasons for the brand’s strength
and potential. Changing them could spell its demise. The acquirer needs to ask:
Who is the sales force?
Most of the competition is direct store delivered by a dedicated sales force; this
brand is sold by brokers and delivered to the chain warehouse.
How is the product delivered?
Most of the competition is delivered at ambient temperature; this brand is shipped
and stored frozen and kept in the backroom freezer until it is time to display it for
How is the product displayed?
Most of the competition sits on a shelf; this brand has succeeded in getting
permanent racks in thousands of chain grocery stores without paying placement
How many SKUs does the product have?
Most of the competition has 20+ SKUs; this brand has 6 (and only because 3 new
ones were introduced in the last 24 months!)
Opportunities and tiger traps abound. But we digress.
So what does all this tell us? It makes a compelling case that every merger, acquisition
or buy-in would benefit from a strong marketing component in the due diligence process.
It can reveal hidden opportunities and prevent potential disasters. (Diet Raspberry
Snapple anyone? Damn, there’s that sound again.)
In the weeks and months ahead we are going to explore the subject in greater detail.
You are welcome to come along for the ride.
Earlier we mentioned the need for an unbiased marketing due diligence effort and that’s
the subject of an upcoming paper. An acquirer may have several resources for
marketing advice: their own marketing department, their advertising or public relations
1 1 We just spent a weekend re-reading the Chairman’s Letter to the Shareholders in all of the Annual Reports of Berkshire Hathaway
Inc. since 1977. We find it is a great refresher course in this business that pays dividends over and over again. But that’s another white
agency or even the management team they may put in place at the target company. And
each one is the wrong choice for marketing due diligence work. In the next few weeks
we’ll tell you why.
If you would like to receive future white papers or learn more about the marketing due diligence
services of Marketing Valuation Partners, LLC, contact Lowell Wallace at (312) 372-6112 ext.
5570 or email him at firstname.lastname@example.org.
2006 Marketing Valuation Partners, LLC. All rights reserved.