As the Asset Management, Wealth and Insurance industries evolve, participants continue to pursue M&A for a variety of reasons, whether it is to access operational scale, diversify product offerings, enter new markets or obtain enhanced technology capabilities.
Operations due diligence (ODD) is critical within the deal process to provide confidence on the cost base to feed Quality of Earnings adjustments, validate the ability of the business to scale and meet Management’s business plan, identify Value Creation opportunities and assess the extent of operational risk within the target company. Doing this will thereby increase confidence in the investment thesis and deal valuation model.
What is Operations Due Diligence?
ODD entails a comprehensive assessment of a company’s cost base, involving analysis of organizational structure, processes, capabilities, and risks.
It goes beyond financial metrics to evaluate how a company functions on a day-to-day basis and whether its operations are efficient, scalable, and sustainable.
Why it Matters
Conducting ODD enables acquiring firms to identify where a deal offers upside potential and where operational risks may erode value creation.
1. Provides a clear picture of the operating leverage
a. Cost structure analysis: Examining fixed and variable costs to identify opportunities to improve margins
b. Efficiency improvements: Evaluating and streamlining inefficient operational processes can reduce unnecessary expenditure
c. Scalability: Understanding capacity for scaling operations without an increase in costs allows for increased growth opportunities; including analysis of whether additional cost is required to support the business plan that is not already factored in
2. Identifies Value Creation opportunities
a. Process optimization: Implementing best practices across the operating model can lead to significant cost savings and enhanced productivity
b. Transformation: Assessing in-flight and historic transformation plans and the required capabilities to execute the value creation plan
c. Go-forward cost base: Analyzing the future cost base over the investment horizon as value creation initiatives are implemented and calculate the associated one-off costs to achieve
3. Highlights operational risk and required mitigating actions
a. Operational resilience: Reviewing historical operational performance, scalability constraints and maturity of operational risk management framework
b. Third parties: Examining usage of key third party suppliers, their suitability, historic performance and robustness of oversight models in place
c. Operating model inefficiencies: Assessing the extent to which unnecessary complexity in the operating model is inhibiting flexibility, scale and growth
Recent case study example
Client Issue: Alpha recently advised on a transaction where the Target (a software vendor to the Asset and Wealth Management market) was planning to launch several new products in the coming years and their successful implementation was a critical input to executing Management’s business plan. Questions were raised over Management’s ability to deliver the change roadmap and the scalability of the operating model to handle the forecast business volumes.
Alpha Approach: Through robust questioning of Management’s approach and using industry insight from similar case study examples, Alpha was able to make suggested adjustments to the business plan and transformation approach for the client to implement upon Signing.
Client Result: This resulted in Quality of Earning adjustments that flowed through to the valuation model and provided the client with actionable mitigations to take, which altogether increased our client’s confidence in the deal.
At Alpha, using our industry expertise and experience, we take a deliberate and targeted approach to ODD which includes the following:
- Understanding your objectives: We take the time to start by understanding your specific objectives and context of the due diligence process, tailoring our approach accordingly
- Data analysis: Our team of experts will meticulously review all key documents from organizational structures, operational processes, supplier contracts and other key areas. This allows us to gather comprehensive insights into the target company’s operational health and identifies potential risks and opportunities
- Discovery & interviews: We effectively engage with management teams and key stakeholders to gain insight into the company’s operations, culture, and strategic direction to inform our analysis. Our team are well equipped to ensure there is effective communication with stakeholders to ensure transparency and alignment throughout the process
- Actionable insight & recommendations: We deliver actionable recommendations and insights that empower our clients to make informed decisions and optimize operational performance post-transaction. Due to our narrow industry focus, solely consulting to the asset management and insurance industry, we can leverage deep industry insights and subject matter expertise to provide specific advice and assistance to our clients during the M&A process
To learn more about ODD and Alpha’s related offerings, reach out to enquiries@alphafmc.com.
About the Authors
Tom Piotrowski
Engagement Director, Strategy & Deals
Tom is an Engagement Director at Alpha, focused on advising clients on their M&A activity within the Asset Management, Wealth and Insurance industries. Tom's deal experience spans the M&A transaction life cycle, including pre-deal due diligence (commercial, operations and technology), value creation initiatives and post-deal integration / separation execution. Tom has worked on domestic and cross-border M&A transactions spanning different geographies, including UK, Europe, North America and Asia-PAC.
Sam Gevirtz
Engagement Lead, Strategy & Deals
Sam is an Engagement Lead at Alpha with 9+ years of industry and consulting experience within the Asset Management and broader financial services industry. Sam has managed and delivered on a wide range of M&A engagements, spanning across technology, operations, and commercial M&A due diligence. Prior to joining Alpha, Sam was a Senior Consultant at Casey Quirk, a Deloitte Business, where he provided strategy consulting services to asset managers, wealth managers, and other financial institutions.
Alexandra Peel
Senior Associate, Strategy & Deals
Alexandra is a Senior Associate at Alpha specializing in M&A across Asset & Wealth Management and Private Equity. Prior to joining Alpha, Alexandra worked in PwC’s Deal Advisory business across various functional areas. Alexandra’s experience ranges across the deal lifecycle, ranging from market scans and pre-deal due diligences through to integration planning and execution. Alexandra also has valuations and strategy experience with respect to assisting executive teams with their strategic planning and operating model design.