Merry Widow in the land of milk and honey: An acquisition disaster

You would think that the people charged with conducting due diligence for a potential acquisition would subscribe to the adage, "Haste makes waste." Long ago, I was involved in an acquisition in which that saying was ignored, at great expense. It's a situation that's painful to recall but full of valuable lessons.

The target was a technology-based company. Its business involved receiving timely financial data over its own network, using proprietary software to analyze it and then providing the results to subscribers, again over its own network. The company's revenue stream was 100% dependent on properly functioning IT.

Despite that, my technology function was not represented on the "acquisition hit team," as its members referred to it. I argued that my group's assessment could be crucial in such an acquisition, but the hit team's leader, an outside M&A consultant, replied that it wouldn't be necessary because he was comfortable with technical matters. He told me that he didn’t have time to keep every internal technical, corporate and administrative function involved in every acquisition decision. I was a newly appointed CIO, and seeing no support for my position, I didn't press the matter.

Very quickly, though, what should have been clear warnings about the dangerous ground we were treading on started appearing. To make sure that the acquisition was under the radar of the business community, the acquisition hit team gave the targeted company the code name of "Merry Widow." The team decided that the target should have a code name for referring to our company as well, and it thought it would be a sign of goodwill to let people at the target company choose one. Their response? "Milk and Honey." Somehow, no one on our team saw the significance in how Merry Widow pictured us.

A couple of weeks into due diligence, Merry Widow's financial and growth indicators looked positive. Its profitability appeared stable and rising, if slowly, and surprisingly, its costs didn't increase with volume growth or with recent additions to what was offered to Merry Widow's clients.

At that point, Merry Widow told the leader of our acquisition hit team that it had been approached by another company interested in acquiring it. Merry Widow's response had been "Not now," but our hit team leader panicked.

He convened an urgent meeting with our president and general management team (which included me). He told us that he and his team were very positive about Merry Widow, and therefore not surprised that another company was sniffing around. Because of the risk that we could lose the chance to acquire Merry Widow to a competitor, he suggested cutting the due diligence period from 90 days to 30 — two more weeks! A couple of us on the management team wanted to take longer and err on the side of caution. We argued that we needed to fully understand this technology-based company before investing in it. A compromise was reached: that due diligence period was cut to six weeks. Merry Widow quickly agreed. Another clue....

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