The one area that could be strengthened is the piece on ‘strategic due diligence’. Having worked on this a bit with PWC, it looks like financial due diligence still overwhelms all other issues in the acquisition planning process. I’ve never bought the ‘acquisitions don’t work’ findings that everyone seems to just accept as true. All the studies I’ve seen look at the wrong indicators to arrive at this conclusion – often short- to medium-term movements in stock price. But we’ve seen repeatedly that stock price movements are a pretty useless indicator of strategic value, probably because investors have little clue how a company’s strategy relates to longer-term earnings prospects.

Good acquisitions not only give rise to immediate synergies [which may or may not give a financial pay-back on the deal], but also

1. give access to additional resources that enable the merged company to drive performance that was otherwise not accessible, and
2. [even better!] enable faster development of yet more resources and capabilities that will drive performance still further in the future

Neither of these are usually sufficiently recognisable to outsiders at the time, and are too distant to be well-reflected in the stock-price.  

One reason strategic due diligence is so hard to do is the abstract and confused terminology on the very issues that make it important – resources and capabilities. This makes it hard to measure these things, and even harder to work out their impact on longer-term performance. See chapters 9 and 10 of Strategic Management Dynamics for a clarification.

The article by Shumeet Banerji CEO of Booz & Co and Neil McArthur MD of Booz Europe helpfully groups firms into 4 categories – strong, stable, struggling and failing. You would expect stable companies to be strengthening their position by seeking complementary acquisitions, and the weaker groups to be conserving cash, for example, but neither group is by and large pursuing these or other appropriate actions.

The survey also confirms another finding I expected – that most firms expect to emerge stronger from the downturn [especially in developing economies]. ‘Most’ may be disappointed, but many firms should do so and be working towards making it happen.

Boom times create all kinds of difficult industry conditions – competitors charging into ‘strategic’ initiatives that make no sense, new entrants taking on markets they have no hope of succeeding in, everyone expanding too fast and creating over-capacity. It’s when things get tough that all these challenges pile up and get too much for weaker firms – and that’s when strong firms can sort out the mess. So, for example, we should be seeing more acquisitions and faster rationalisation than seems to be the case. No surprise either that developing economy firms are more optimistic – in addition to their lower basic cost base, their recent arrival means many have been able to grow a ‘clean’ business model, while established firms in old economies were adding on bits and pieces and complicating their businesses. I know which position I would rather be starting from today!