Why Not Evaluate the Acquired Company's Management on Corporate Profits?

This is the most traditional approach, and it is good so far as it goes.  Certainly, it does pay respect to salient—even critical—data.  But good numbers can mask weak talent.  The acquired company may for all practical purposes have been a one-man show.  There may be no backup.  That in itself is bad enough, but it becomes even more critical if the front man happens to depart in the aftermath of the acquisition.

There are too many external biasing factors that deserve consideration for the parent company to simply assume that incumbents truly do deserve full credit for the current set of numbers.  A quantitative analysis can be misleading in a variety of ways.

A Product of Good Times

A benevolent economy may deserve most of the credit for the acquired firm’s good financial performance.  So the question that deserves thought is whether there is much proof that incumbents can manage a down economy or a post-merger situation successfully.

Short-Term Perspective

Management may be guilty of mortgaging the future to achieve short-term results. Statistics that look good today may have been achieved at tomorrow’s expense.

For example, the financial ledger may look good because there has been no money spent on R&D, capital improvements, and so on. The workforce may have been slashed to cut overhead, but this may have been done at the expense of adequate servicing of the company’s products.  And, given time, these sorts of executive decisions could conceivably prove devastating to the firm.  Numbers that look good on the surface may actually be fragile evidence of executive talent.  Management may have built a house of cards that faces a shaky, uncertain future. . . .