Christopher Benjamin, Associate looks at conducting effective due diligence and mitigating post-acquisition risk in an article published in Acquisition International magazine
Why change a winning formula? It has recently been reported that Cadbury experienced a £6m dip in sales on its renowned Crème Egg following a change in recipe from Dairy Milk to a different mix of chocolate. Despite Cadbury’s assertion that the Crème Egg has only been made using Dairy Milk chocolate in six out of its forty five year history, this case shows how decisions made following acquisition (Cadbury was acquired by American multinational Kraft Foods) can have a significant effect on the newly acquired company post-completion. Did a post-acquisition business decision around lowering costs of production of the Crème Egg overlook the long-standing public attachment and loyalty to an existing product, and was this an issue that Kraft could have identified at a commercial and cultural level during the acquisition process?
Most buyers seek to mitigate risk in M&A by considering a mixture of commercial, financial, tax and legal due diligence with warranties and indemnities in the legal documentation. Due diligence helps the buyer to gain a clear understanding of the target business before it is committed to the deal. Warranties and indemnities provide post-acquisition financial compensation if the buyer finds that that the target’s position in areas covered is not as held out to be by the sellers.
The Cadbury example perhaps highlights a less obvious area for due diligence focus. Would more deals be viewed as successful if greater attention was paid to gaining an understanding of the target company’s culture?
To read the article in full, please click here.