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 acquirer 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.

The Hand of Fate

Pure luck may have been on the company’s side. Chance timing may deserve most of the credit, as management simply may have stumbled into good fortune. Or a foolish gamble may have worked, although it never should have been taken.

The trend that has buoyed the financial picture may be about to reverse–for example a fast-growth strategy may be on the brink of corporate wreckage, with financial resources overextended and management capacities strained beyond reason.

Undeserved Credit?

It is possible that good numbers result primarily from the backup strength given by managers or technically skilled individuals who have already left the firm or who probably will leave. Likewise, managers or technical people may have been in slots where their own effectiveness has been masked by the strong or weak performance of another person.

In other words, who really owns the statistics? Who is primarily responsible for the acquired firm’s present financial status? Who has taken up the slack for whom?

A Race with Only One Runner ...



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