When bad things happen to good mergers.

• Author: Gooding, Richard Z.

More than two-thirds of acquisitions fail. In fact, some out- comes may surpass mere failure and qualify as a genuine disaster. Just ask Novell, which bought WordPerfect for $1.4 billion and sold it 18 months later for $1.2 million. Then there's Quaker Oats, which took a billion dollar write-off for its Snapple fiasco.

It is possible to benefit from the process, yet the architects of many a surefire deal too often end up scratching their heads and wondering why they got a dud. After all, they followed the canons of due diligence, thoroughly exploring the financial and legal aspects of the transaction. Trouble is, they overlooked other potential sources of failure. If the focus of due diligence is just legal and financial, other risk factors can fester until implementation begins. By then, you can't do much but cut your losses and look stunned.

Or they may have been caught up in the "romance of the deal." Business acquisitions are hypnotic. You see two companies, their hearts beating as one, dancing to the beat of commerce, lucratively in love. And you fall hard. The due diligence process creates momentum that causes companies to acquire businesses they know in their hearts are likely to fail. But the due diligence team and its M&A advisers put so much time, effort and money into the proposition, it's nearly impossible for them to turn back.

Watch Your Step

The high failure rate is the result of the way managers think. In a process that should be exhaustively thorough, they take shortcuts that create "decision traps" that lead them to ignore, overlook or rationalize key information. Three of the deadliest are the confirmation trap, availability trap and escalation trap. Acquisitions don't fail because of the unknown, but because managers are unwilling to face the known.

Companies caught in the confirmation trap focus on data that confirm or support the transaction and ignore adverse information. Disregarding the seeds of failure won't make them stop growing. You can avoid this trap through deliberate attention to "disconfirming" the information, being realistic when making acquisition decisions and optimistic when implementing them.

Relying on the most conspicuous information gets companies ensnared in the availability trap. Often, acquisition decisions are based on the input of too few people. Critical issues and pitfalls get overlooked. But awareness of how availability can bias the acquisition decision - and systematic examination of less obvious viewpoints - can disarm it.

The escalation trap takes over once due diligence is underway. All the time and effort due diligence requires becomes a factor in the equation. And managers forget one basic principle of any investment decision: Ignore skunk costs! Moreover, turning back implies their original decision to pursue the acquisition was ill-conceived. The odds of stopping the due diligence express once it builds up a head of steam are slim to none.

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