When deals go sour.

• Author: KABACK, HOFFER

Directors who exercise less than rigorous oversight should share culpability with the CEO.

HOW SHOULD accountability be apportioned when an acquisition championed by the buyer's CEO, and duly approved by its board (almost always unanimously), goes sour?

In the history of M&A, many deals have worked out badly -- some spectacularly so and some spectacularly quickly. In late June, First Union announced that it was shutting down The Money Store (for which it had paid over $2 billion a few years earlier) and taking a huge write-off. Observe that First Union is not taking a write-down while seeking to unload Money Store at a substantial discount from original purchase price. First Union is closing Money Store. Ending its business existence. Can there be a worse grade on a deal report card?

Other disastrous deals include (a) Mattel's purchase of Learning Co., which went sour within months of the closing and led, in substantial part, to the firing of Mattel CEO Jill Barad; (b) Quaker Oats' purchase of Snapple, subsequently unloaded to Triarc for a fraction of the price paid to buy it from Thomas H. Lee & Co.; (c) AT&T'S purchase of NCR; (d) Sony's purchase of Columbia Pictures; (e) Oxy Pete's purchase of Iowa Beef Processors; and (f) Conseco's purchase of Green Tree Financial. (HFS' combination with CUC to form Cendant is in a special category because, there, fraud was involved.)

When urged by the CEO to approve a significant acquisition, a director of the putative acquirer may go through one or more of the following internal conversations:

1. Our CEO, Joe, is strongly pushing this deal; if it doesn't work out, it will be his head -- not mine -- on the block. After all, he'll get all the glory for his "vision" if the deal turns out well.

2. I can't be expected to do due diligence. That's why we have a CFO, investment bankers, lawyers, and accountants. No way can I tell, from the outside, if the putative acquiree's assets are properly stated, its liabilities fully disclosed, its products not obsolete, its customer base solid, or its revenue recognition proper. If it turns out that the due diligence professionals have screwed up, I'm certainly not accountable. Surely I am entitled to assume that that work has been done right.

3. I don't have time to read the merger agreement carefully -- indeed, at all (it's 50 pages!). I'm entitled to rely on counsel's having drafted it correctly and on counsel's summary of its key points at our board meeting.

4. If...