The Warning Signs of a Disastrous Deal

Last Updated Apr 30, 2007 2:28 PM EDT

Last weekend's Wall Street Journal had a useful article written by a London Business School professor on how to tell whether a merger or acquisition will end in a debacle for your company. You can read the story here if you have a WSJ subscription. If not, here's a nice summary provided by Brand Autopsy.

1. Preoccupation with Bigness
“Many managers see acquisitions as a relatively easy and quick way to increase a company's size, compared with the painstaking process of organic growth.”

2. Deal-Happy Executives
“Some executives can become preoccupied with making deals -- and the thrill of selecting, chasing and seizing a target.”

3. Lack of Experience with Acquisitions
“When a company with little acquisition experience does undertake an acquisition, employees of the acquired business often find that the company is intolerant of different ways of doing things, which can lead to serious integration problems and employee turnover, among other things.”

4. Fast-Track Integration
“Acquirers often seem to develop a preference to either completely and quickly assimilate a target (to avoid a lengthy integration disturbance) or to leave the acquired unit autonomous (to avoid disrupting existing systems and processes).”

5. Off-Strategy Rationale
“A strategic rationale to combine two companies should explicitly state how the merged enterprise will be able to accomplish something in the marketplace that neither company could have achieved alone.”

6. Too Much Attention on Selecting the CEO
“Sometimes the single biggest hurdle in a deal is the question of who will be in charge after the merger. Such negotiations indicate that the logic for a deal may have more to do with advancing the careers of executives, rather than advancing the value of the combined companies.”

7. Belated Discovery of Synergies
“Sometimes, a company mysteriously uncovers extra value in a transaction when the potential seller's rivals are starting to outbid. That's a sign to company directors and investors that executives might be at risk of committing value to a deal which the company won't be able to recover.”

8. Initiation of a Deal Comes From Outsiders
“When the deal is initiated by an intermediary, however, extra care should be taken to analyze the strategic rationale. Investment bankers, for instance, may attempt to initiate deals where the benefits to the acquirer are unclear.”

If you want a reminder of the dangers of an ill-suited merger or acquisition, check out this top ten list of worst Internet deals ever from SeekingAlpha. 

(Photo above by ianb888