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 first is easily dealt with – stronger cash flow ‘growth’ than rivals can of course imply less decline when everyone is going backwards .. would you rather cash-flows fell by 50% or only 20%? We just need to add the check that this is sustainable – as I have argued with the Starbucks case, slashing costs to sustain immediate cash-flows [and support ROIC] is hardly welcome if it damages future cash flow.

I find the second response intriguing – that strategic management is all about survival, and anything extra management may achieve is just a welcome bonus. First, this does not seem to have been the primary concern of CEOs for most firms during reasonable economic conditions [at least after the high infant mortality of start-up!]. Maybe it should have been.

But there’s a bigger question as to whether survival should be the aim in any case. It is easy to see situations in which it would be in everyone’s interests for a firm not to survive, but to be acquired – both in positive and negative circumstances.

• In my time practising strategy, we constantly sought out promising smaller businesses to acquire and develop. This was good for their owners, who got good cash returns for their investment – good for customers, who got faster and wider access to the good products and services of those businesses – good for employees, who got more job and career opportunities – good for suppliers, who got a stronger, faster-growing  customer to supply – good for their management, who often had access to bigger jobs or else also left with a nice cash handout. Apart from competitors, I can’t think of any group who suffered. Indeed, many smaller businesses start up with the deliberate intent of being acquired in this way. For a big-scale example of a serial-acquiror who has exploited this phenomenon, it’s worth checking out Cisco – here’s an interview with their head of business development and just one case study on the story .. you will find a ton more case studies at European Case Clearing House.
• It’s not even clear that death necessarily does harm when it’s the final outcome of business failure. If death = acquisition by another company, investors can get value that would otherwise have disappeared, customers can get continued provision of products and services that may otherwise have discontinued, suppliers get a continuing sales opportunity, and employees get the chance of a continued job rather than redundancy.

Unfortunately, even when others would benefit hugely from a business being absorbed by another, one small group likely to suffer unfortunately dominates whether it happens or not – management themselves. So I find myself wondering how many firms are currently strugging to survive when it would be best if management spent their time seeking a buyer instead.

The only form of survival I can see that might be a reasonable aim for strategic management is the avoidance of bankruptcy – but that’s the extreme case, and responsible management should be able to find better solutions in almost all cases, well before that becomes unavoidable.