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Helpful Hints To Make Your Export Performance And Compliance Easier In today's marketplace of the all-powerful customer, due diligence must include a marketing component, not just legal and financial, especially for international transactions. The words "due diligence" typically conjure up images of checking civil and criminal court filings, verifying trademark, patents, title, investigating tax liens, etc. However, given that the primary reason for due diligence is to assist with valuation and that typically only 20% of a valuation is tied to tangible assets, it is clear that simply validating a company's balance sheets and legal contracts will not suffice. In today's marketplace where costumers enjoy ever increasing amounts of power, due diligence cannot be limited to financial and legal issues; it must include a marketing component. In fact, marketing due diligence should be conducted for the full range of new market entry strategies, whether it's simply forming a partnership or an outright acquisition. There are two primary reasons why due diligence teams need to include a marketing executive or strategic advisor, especially when considering an international transaction. The first reason is that, in today's consumer focused market place, brand equity is recognized as a critical driver of overall company performance. Numerous studies have documented the correlation of brand equity to company profitability. For example, EquiTrend's study documented that the firms experiencing the largest gains in brand equity averaged ROIs (Return on Investment) of 30% while the largest declines in brand equity were tied to negative ROIs averaging 10%. In this environment, it is critical to include representation from the team that best understands the customers and the marketplace when determining a potential transaction's impact on performance. This is especially true when considering an international transaction or partnership since it is the cultural/societal norms that drive those all important product/service perceptions. The second reason is that an increasing number of transactions are done for its revenue growth opportunities or for "strategic" benefits, not just to cut costs. When the aim of the transaction is to grow revenue or to create a long-term competitive advantage, the success of the transaction will depend heavily on customer and marketplace dynamics. Again, who better to judge that then the marketing executive or strategic advisor that bests understands the customers and the marketplace? Especially when considering an international transaction, marketing due diligence will be critical in assessing how the customers and marketplace will affect a transaction's ability to grow revenues or create a long term competitive advantage. Finally, marketing due diligence needs to be conducted since customers leaving after an acquisition is one of the biggest reasons for the notorious 70% M&A failure rate. A marketing executive or strategic advisor is best positioned to help the M&A team to determine if and why customers would leave after a transaction and what steps need to be taken to mitigate that loss. Quaker Oats' acquisition of Snapple illustrates the importance of marketing due diligence in any M&A effort. In 1994, Quaker Oats spent $1.7 billion to acquire Snapple which represented a premium of 28.6 times earnings and 330% of revenues. However, within just two years, Quaker Oats turn around and sold the company for $300 million. Not exactly a stellar ROI! Although many reasons attributed to this M&A failure, several were "marketing" in nature. For example, Quaker and Snapple had problems integrating their distribution systems which angered bottlers and led to early losses in sales - an issue marketing due diligence would have identified as critical for success. Quaker also severely damaged the brand equity Snapple had painstakingly built with its customers when it discontinued using the face of the brand (i.e. "Wendy") and its voice (i.e. radio endorsements by celebrities such as Howard Stern and Rush Limbaugh). Marketing due diligence would have identified that Snapple's brand, and hence its success, was built upon those icons. And finally, marketing due diligence would have uncovered the fact that Snapple was quickly loosing market share to competitors like Lipton, Mistic, etc. The importance of marketing due diligence should be clear by now, regardless of whether the transaction is an informal strategic alliance or an outright acquisition. So what exactly is marketing due diligence? Marketing due diligence should include a comprehensive review of the target's marketing and sales infrastructure, sales and marketing plans and their feasibility, and feedback from customers, suppliers, and other critical relationships in order to answer two questions. The first is how attractive is the market the transaction aims to enter or create (i.e. market risk)? How established is the product in the market? Is the market correctly segmented and targeted? What pricing dynamics will affect future profitability? Are the sales volumes and forecasted growth projections supported by evidence? The second question is will the new entity have the resources, experience, etc. to be able to take its share of the pie (i.e. execution risk)? A marketing executive or strategic advisor can help the due diligence team answer these questions and ensure that the transaction achieves its objectives. In fact, many argue that marketing should be involved from the earliest pre-merger due diligence through the post-merger integration phase because they understand the customers and the marketplace the best. For example, marketing can help select the right partner that is complimentary to their existing brands. In addition, marketing's efforts are helpful in integrating the two company's marketing plans and ensuring service to customers is uninterrupted. However, a good start is granting the marketing executive or strategic advisor a seat at the due diligence table. He/she will be critical to ensuring that your international transaction does not become one of the 7 out of 10 M&A's that fail! For more information on this topic, assistance with issues related to international growth or to discuss your current situation feel free to contact Virtual Strategies, Inc. at 202-776-0500. We help clients of all sizes respond to changes in the marketplace and realize opportunities to profitably grow their companies. Reba Philip Virtual Strategies, Inc. www.vsidc.com rphilip@vsidc.com