The Diligent Soul

Lessons from Both Sides of the Due Diligence Process, taught by Michael Jackson

I have always enjoyed performing Due Diligence. One Due Diligence trip took me to Southern California, where I went ocean kayaking with my company’s CEO. Another trip involved a 12 hour car ride and a late night border crossing into Canada, where the immigration officials questioned me to make sure that I was not planning to take jobs away from Canadian workers.

Over time, I have also come to enjoy being the subject of Due Diligence. When I’ve been the subject of Due Diligence, there haven’t been too many kayak outings or road trips. Instead, there have been awkward moments when I’ve misunderstood a question, and there have been last-minute preparations and changes to presentations, that only made everyone more confused and less confident. But in a way, being the Subject of Due Diligence is a like showing off your project at the science fair. It’s great if you’re well prepared and it really helps if your relatives have all contributed time and money to your project … but on the day itself, it all comes down to how well you explain your work, and how quickly you can recover if something goes wrong. Good science students break things and fix them, they learn from failure, and they express delight when something unexpected happens. Successful Due Diligence subjects also manage that fine balance between confidence, enthusiasm, humility, and a sincere desire to make things work.

The Due Diligence projects in which I have participated always had the same players: One company (the Acquirer) is interested in acquiring another (the Target).

Being the Acquirer

The Acquirer puts together a team whose mission it is to understand the business of the Target company they want to acquire. A product manager can add great value to this team, by analyzing the Target company’s products, technology, product development processes, and market position. A product manager can answer questions such as

• If we combine the Target company’s product with ours, can we create an integrated offering that will be attractive to current and prospective customers?
• Do the two companies have a similar vision of market trends?
• What might a combined product roadmap look like?
• Do the two companies have compatible development processes?

Acquisition projects often have a code name, made up by an outside advisor who hopes to gain high consultancy fees. The companies may agree to meet at offsite locations such as lawyers’ offices or hotel meeting rooms. With such secrecy and obfuscation going on, how can an acquirer really get an idea of a company’s products or processes?

My answer, of course, is to try and find the Target company’s SOUL. Is its soul young, confident, but somewhat naïve about the market out there? Or is its soul mature, deeply scarred by harrowing experiences, and somewhat cynical in its outlook? As a product manager, you have a unique ability to find the soul. You may be less focused on financials or facilities, and have the flexibility to ask off-the-wall questions.

Look for the Soul

If you have the ability to go onsite, there are plenty of ways to go soul-searching
Peer at the whiteboards and cubicle walls. Are they bare, are they laden with irreverent cartoons, or are they overflowing with creative ideas that never had a chance to make it to market?

Look at the breakroom and if you have chance, peer in the fridge. Are drinks and snacks freely available to everyone? Does every employee careful label his or her own lunch items? Are there things growing in the fridge?

And don’t discount the bathrooms. Some companies have elaborate locker rooms so that employees can change after a workout. I came across one company that had relabeled the women’s restroom to serve as a second men’s room.. since they had no female employees and apparently did not expect any female customers, vendors, or partners to ever come on the premises.

If you have the ability to touch and feel development tools and see various development artifacts, there are many great insights you can gather
If developers show you specs or designs, scan across the table of contents to see if all applicable sections are present. But also look at the document headers and footers, and see if the author’s name appears. On many occasions I have found that these deliverables were actually created by outside consultants or highly prolific former employees, and there’s no-one around who can claim ownership of these documents.
Look at the dates on the documents. See if there is a steady flow of documents that are created, reviewed, and updated. From this, you can validate that the development team has a well-established rhythm for doing design, development, and testing. On the other extreme, you may come across large volumes of documents that were all created in the past three days, in preparation for your visit.

The soul behind the demo

If you have a chance to see a product demo, you’re in for a good time. You want a chance to see the product as it is actually used by customers, rather than a canned demo. If you can, try to get the demo-er to stray from the script. Be encouraging rather than confrontational. If you get too confrontational or critical, if you sigh or roll your eyes when things don’t work, if you rudely ask the demo-er to skip the steps he or she has carefully prepared, you lessen your chances of getting to see the soul of the product. So try to be encouraging. Show appreciation for the work that has gone into the product, Acknowledge a good feature or a good choice of sample data. Give the demo-er an opportunity to show off what works. “That’s very effective: your system allows Carlos at the Convenience Store to check available stock at his supplier. Now, I’m guessing there’s a way for Simon at the Supplier’s warehouse to fill an order?”

The demo-er can guide you to the product’s soul. Once the demo-or is comfortable, use your time together to find out more about how customers really use the product. “I like how the reports are organized. Do your customers use these reports on a daily basis, or do they prefer to download the information for periodic analysis?” “We spend a lot of time training system administrators on how to troubleshoot the job queues. It looks like you’ve come up with a way to make the queues easy to manage. Do you get a lot of support calls when they have to be restarted?”

If you do find a glitch or a flaw… ask the demo-er for ways they would fix it.
“It looks like some of the menu items disappeared when you logged in again. It’s great that your product has the flexibility to add or remove menu items depending on who’s logged in. Do you have an efficient way to maintain these types of settings? How do you perform testing?”
“You just aborted the data migration program. Do you have a way to validate that initial migration was rolled back? Do most of your customers migrate data from old systems, or do customers generally start with a brand new implementation? Are data migrations an opportunity to charge extra fees?”

Here are some other tips for productive soul-searching a Target company

Beware of the hood ornament. Many target companies bring in board members or advisors to participate in due diligence meetings. Oftentimes these folks have very little to do with the day to day operation of the business and you would never ever work with them, should your company acquire the Target. They may have great credentials and connections and a far-reaching vision of the market, but if that vision isn’t shared by your fellow product managers or by customers, they are just hood ornaments: shiny statues that lend a touch of class to an otherwise unimaginative vehicle. Don’t waste your time listening to their war stories – you have more important things to do like opening the fridge.

Show that you are open to synergies. Your counterpart at the Target company is well aware that if the acquisition goes through some challenging issues will need to be resolved. Who will report to whom? Will one of you have to go? Will one product be discontinued in favor of another? A Due Diligence meeting is no place to discuss these issues, but it’s also no place to act as if it’s a foregone conclusion that you will be the boss, and your product will be the dominant product. I was very fortunate in one due diligence project, when I met my counterpart at the Target company. We quickly discovered that we were both in charge of marketing and product management. His passion was in marketing. Mine was in product management. I dug through his specs and spreadsheets with gusto and showed enthusiasm for technology. He snickered at my marketing materials and immediately started brainstorming new names and slogans for the combined company. We got along very well throughout the entire process and six companies later we are still in touch.

Use a checklist of general areas you want to cover, but be prepared to stray. Some people like to bring a laptop and take notes in real-time, but I prefer to carry a notepad and jot down notes. It makes me more mobile. I put a paperclip on one page, where I have written down my questions, and then on subsequent pages I just write down everything that is discussed. Periodically I flip back to the paperclip, and see if we’re covering the right topics.

Being the Target

Now let’s look at the other side and examine some great moments in the life of a Target company product manager.

The first thing to consider is preparation. If you have the time, have a group meeting with all the individuals from your company who will take part in the Due Diligence. Decide who will cover what topics and who will fulfill which tasks. Get clear agreement on which topics can only be addressed by the CEO or CFO and stay away from those. Preparing for Due Diligence is a bit like preparing for a set of final exams. Practice and prepare material on the difficult topics first, then move on to the ones about which you are more confident. That way, if you run out of time, the hard stuff is done.

Sometimes during the flurry of preparation it is easy to lose confidence. If you’re presented with a long checklist and you realize that you can only answer 5 out of the 65 questions... you may wonder how you’re going to make it through the meeting. If you’re comfortable with it, you can exaggerate in some of your responses. But I don’t think it’s a good idea to make things up that you or your colleagues won’t be able to substantiate. If the Acquirer asks you for the agenda and proceedings of your most recent user group and you don’t have a user group… a voice inside of you may be screaming “We don’t have a user group, we don’t even have any account managers, we use our tech support reps to try and uncover new requirements from customers while they run around trying to get bugs fixed.” As the voice is screaming, formulate your answer “We don’t hold user groups yet. Our support staff keeps a database of enhancement requests, and we periodically followup with key customers to show them when we plan to address their requests. We try to devote some of these conversations to more big-picture items, like market trends, and product direction, and we are getting positive feedback from our customers when we do so. We plan to formalize this into a user group, and we will initially reach out to our customers via webinars and social networking sites, rather than by holding a traditional two-day meeting.”

Act you Age

If you’re with a startup company, don’t apologize for your lack of maturity. Chances are that several of the acquirers have worked at startups, and value the fast pace and flexible processes you are about to reveal to them. During a review of our product launch checklist, I proudly explained to the Acquirers that our product launches had gone from 3 pizza events to 10 pizza events, and that we were confident we could continue to scale. We also talked about using a Wiki to distribute product release notes, about securing reference customers, and about briefing analysts. But the pizza comment was the one that stayed in everyone’s memory, because it illustrated quite effectively where we were in terms of size and growth.

If you’re with a company that’s gone through cutbacks, the topic may come up. Discuss the cutback without resentment or gloating. There’s no need to brag about a whirlwind visit to several offices, during which you terminated people left and right. Show how the company has done its utmost to retain valuable assets and how it is ready to grow. Show how the company has learned from past mistakes, and how it is better able to monitor unprofitable products, take control of projects that run over, or eliminate inefficient operations. The acquirer probably is not looking to bring on a team of Terminators, but they are very interested in bringing on people who can help them avoid entering unprofitable markets.

Understand the Acquirer

It is important to understand what the Acquirer considers the most valuable assets: The customer base, the product, the technology, the patents, or some other resource. If the Acquirer is interested in migrating the Target’s customer base to their own product, or if they are interested in using the Target’s call center to expand existing sales and support capacities.. then you may think that as a product manager you don’t have much to talk about during Due Diligence. Still, your view can be very helpful. The customer base or the call center are products… it is important to position them correctly, to understand their profitability, and to have a roadmap for them.

Presenting the product to an Acquirer is different from presenting the product to a Prospect. The Prospect seeks to understand the business benefits of using the product, and is comparing the product against competitive offerings. The Acquirer seeks to understand the business benefits of owning the product, the product’s revenue streams, the product’s underlying patents, and the team that develops and maintains the product. The Prospect may act like someone who is looking to rent an apartment and wants to understand the amenities and the lease term. The Acquirer wants to buy the building and the land it was built on, take on all existing tenants, deal with long-neglected repair issues, and participate in town planning meetings to influence the future of the neighborhood.

Some final Tips

Lookup the background of the individuals who will be performing Due Diligence. In the old days, all we’d have to go by was a boring biography in an annual report. Nowadays, you can use LinkedIn, Facebook, and other resources to find out many details, from college connections to favorite sports teams or foreign language skills. There’s no need to fake an interest in Lacrosse or Deep Sea Fishing. But you can get an idea of who would get along with whom, and use your knowledge to give examples.

Make the visitors comfortable. Just giving someone a place to plug in their phone, or the option to order a vegetarian lunch can make their day a lot more positive and productive.

And a brilliant insight from the late Michael Jackson, The King of Pop.

Michael Jackson often found himself the target of Due Diligence. Back in his Motown Days, he and his brothers would act out the eternal dance of Due Diligence, with Michael signing the part of the Target, and his brothers all ganging up on him as the Acquirers and the Acquirer’s consultants. Do you remember what it sounded like?


Acquirer: A buh-buh buh buh-buh
Target: A buh-buh buh buh-buh
Acquirer: I came today to learn, see
Things I never, never knew before...
Target: Like our products, markets, cash flows
Acquirer: And why 2 plus 2 makes four Now now now, please show me ….
Target: Show you, show you
Acquirer: All about your product, yeah
Target: All about my product
Target: Sit yourself down, take a seat All you gotta do is repeat after me.

CHORUS:
Target: Please pay me
Target: As much as...
Acquirer: 123
Target: Or as much as...
Acquirer: Dough from me
Target: Please pay me, 123, pay me, you and me
Acquirer: Come on, let me explore this just a little bit
Acquirer’s Consultant: Come on, let me read this just a little bit
Target’s Consultant: I'm a going to teach you to hold out for more
Target: Come on, come one, come on
Let me show you what it's all about! Finance, operations and technology
Are the branches of the org chart, see
Acquirer: But without the roots of funding every day, hey
Acquirer’s Consultant: Your business plan ain't complete
Acquirer’s gonna show you Show you, show you
Target: How to do a deal
Acquirer: How to do a deal
Acquirer: Spell "me" "you"
Acquirer: Listen to me now, that's all you gotta do