Don't get hitched in a hurry

Roger Trapp looks at a firm that spots dangerous corporate liaisons

A short while ago a British electronics company was planning to acquire an American rival in order to gain access to its superior technology. In the end it pulled out because although the other company's equipment was acknowledged to be superior to its own the would-be acquirer discovered that reliability was not the most important issue for its customers. They put far more emphasis on being able to call on a network of service engineers.

Similarly, an engineering group's takeover of a smaller competitor was abandoned after it discovered that the target company had a far better reputation than it enjoyed and would probably suffer from association with the predator.

The supplier of both pieces of information was Kaiser Associates, a small American management consultancy that has carved out a niche in the fields of benchmarking and competitive analysis. It has lately moved into "due diligence" at the request of clients who are finding that acquisitions still have an unacceptably high failure rate, despite increasing focus on the financial and strategic aspects.

As a result of its researches, increasing numbers of companies are either calling off deals or are negotiating a lower price.

Due diligence has, of course, been around for ages. But, as Rupert Barnard, vice-president in the London office, points out, it has tended to concentrate on the financial side of deals. What he and his colleagues offer is a more inclusive approach, which aims to find out as much information as possible about not just the target of an acquisition but also the acquirer and the markets in which they operate.

"You can't just take a target's word for it," explains Mr Barnard. "You've got to talk to customers." Nor does it end there. Kaiser people typically interview suppliers and anybody else who might have an interest in the market in order to check out the management's story. It was in this way that they discovered that one company's claim that it had a "partnering" relationship with a supplier was false; it had a conventional arrangement that could be terminated at little notice and therefore made the firm less attractive.

To Mr Barnard and John Spear, his colleague, behind most of these problems are human resources issues that companies continue to be unwilling to face. "It's the people thing. It comes up again, again and again," says Mr Barnard. For instance, a "people thing" was responsible for the bad image of the engineering company that was set upon buying a smaller rival. It can also be seen to be behind poor service and weak relationships with suppliers and customers.

One of the things that Kaiser research can identify is which individuals in a management team are seen as crucial to success and which are deemed to be a weakness. The problem is particularly acute when acquisitions cross borders. There can be great resistance to the culture or strategy of the acquiring company and simple things, such as sending the wrong person out to manage the operation, can have a hugely detrimental effect.

But, above all Kaiser's particular approach is about reducing the risks by finding out as much as possible about a deal beforehand. About a tenth of the information comes from the public domain, while the rest is gathered from interviews.