Numerous acquisitions end up on bankruptcy lawyers' desks, with the buyers, sellers, investment bankers and other parties all wondering what went wrong. Obviously, creating value through corporate acquisitions is frequently more elusive than most dealmakers anticipate. Acquisition premiums are often sufficiently high to preclude anything but the most stellar combined performance of the acquirer and target to achieve a satisfactory rate of return to the acquirer's shareholders. As a result, the path of corporate acquisitions is strewn with disappointments, with nearly 50 percent of these acquisitions ending in divestiture. This is particularly the case where the acquirer is already in chapter 11 and has a myriad of other issues to resolve and improve.

Yet, acquisitions by both chapter 11 and non-chapter 11 acquirers are typically carefully planned. Revenue enhancements, cost-cutting measures and potential synergies are often detailed and serve as inputs to post-transaction projections. Committees are established and task forces staffed. Plans are developed, and senior officers commit resources to increase the likelihood that the combined organization will thrive.

With the steps in place to create value for the acquirer, why do so many transactions create little or no value and, on occasion, result in bankruptcy? Experience from testifying and providing financial consulting to attorneys representing both sides of failed acquisitions suggests that the parties often wind up in court as a result of transactional myopia and ill-conceived optimism, rather than the core reality of circumstances surrounding the deal.

The focus becomes politics and detail. The politics includes who will run the combined operation, who will head up the newly created units of the company, and who will report to whom. Frequently, attention is also focused on details of the transaction and the minutiae of the combined company's operations rather than the big picture issues: What are the sources of future profitability and cash flow? Why will customers want to buy our products? What methods of distribution make the most sense? How can the firm remain close to the customer?

Instead, the focus shifts to the control system and cost-cutting. Spending decisions are carefully scrutinized. Because of the large amount spent on the acquisition, future flows are monitored with Scrooge-like precision, and prices often are raised to fund the purchase. Meanwhile, the customer is attracted by competitors who are pushing their own stability, their products and their organizational simplicity, and often their lower prices.

While it may seem that organizations lose their strategic thrust during periods of acquisition, this is typically not the case. Strategic planning is indeed performed, yet it is often predicated upon an unrealistically optimistic competitive environment and a "best-case" cost structure that does not resemble any of the firm's likely economic scenarios.

Acquisition Myopia

Recently, litigation resulted from the unsuccessful acquisition of one of America's premier trucking firms. The company was a star, with a solid track record of more than half a century. The acquirer was a management group with a similarly sparkling performance history and training at the best business schools in America. As such, they were intent on implementing the most relevant and recent management tools at their disposal. Yet, the implementation caused the firm to become distracted from the goal line. It quickly lost focus and simultaneously lost the ability to remain solvent. Their story follows.

To ensure success, the acquirers hired troops of consultants to provide guidance in all phases of the integration. They included total quality management (TQM) consultants, workflow consultants and even consultants to help select their long-distance telephone provider. They assiduously read management articles from relevant periodicals and regularly viewed training videos.

The acquiring management group continuously developed and revised organization charts as well as workflow processes for their complex trucking operations. They had forecasts for every phase of their operations, which were updated regularly, and had a recession plan should a serious business downturn occur. They also had a perceptual map of the industry, showing their relative strength and changing market share, and even commissioned an awareness study of industry participants. The study showed them to have the highest awareness rankings among their competitors. Moreover, they had a mission statement describing the firm's overall objectives, as well as cost-cutting and value-enhancing programs. Basically, the acquisition looked like a classic textbook example of how to create value. Yet, soon after the deal closed, financial deterioration became evident and the company filed for bankruptcy. Where did management go astray?

Interestingly, before becoming aware of its own problems, the acquiring management commissioned a study of the causes and effects of the bankruptcy of another trucking company. Rather than emphasizing the causes, the study focused on the post-bankruptcy reallocation of market share among the remaining competitors. Not surprisingly, the market forces driving the competitor into bankruptcy were identical to those causing the chapter 11 filing of the acquisition in this case just a short time later. As consolidators in the trucking industry, the new owners found much of the business migrating to firms such as Federal Express and UPS. Yet, each of the studies undertaken by the new owners failed to reveal the trucking companies' changing marketplace.

The lesson: All the fine-tuning and detailed planning could not have saved the company. To have a chance of survival, the company's management would have had to understand the trends of the ever-evolving marketplace. Even weeks prior to the chapter 11 filing, however, they were still revising their organization charts and analyzing management reports with not even the slightest hint of fiscal deterioration. They were convinced that their own erosion of cash flow and market share was only temporary.

Moreover, with all their managerial tools, they forgot the basics. They forgot that watching the sources of both present and future cash flow is paramount, particularly in firms whose cash flow is volatile and whose net margin is only 5 cents per dollar when times are good. When the company entered the 1990-1991 recession, it did not implement its well-developed recession plan because management did not believe it was in a recession until it was too late.

As a result of their focus on modern management tools—TQM, organization charts, productivity measures, forecasts, management reports, training videos, etc.—the acquirers lost sight of what mattered most: the changing nature of their marketplace, the determination of their competitive position and their steadily worsening cash situation.

Organizational Overoptimism

While paying attention to detail and missing the big picture derails many opportunities for value creation through acquisition, other acquisitions fail due to overconfidence and unrealistic expectations. We often analyze failed acquisitions and observe that all the myriad benefits of the acquisition are expected to take place immediately following the transaction. For example, consider the accompanying chart.

Prior to the acquisition, the target was an industry laggard, with a steadily decreasing profit margin. Industry margins were between three and five times higher than the target's margins. Yet, immediately following the transaction, the target anticipated not only to meet the industry average, but to exceed it by an ever-widening margin. While such a scenario may seem unlikely, it is found in numerous failed acquisitions.

Consider the case of a large department store chain in the Midwest. Although this target firm failed to earn a profit in the three years prior to the acquisition, all projections by the acquirer showed an immediate and significant improvement following the acquisition. While in most acquisitions there is a projected time lag to allow for the implementation of the planned improvements, no lag was accounted for in the acquirer's projections. For example, both the closure of several departments and the opening of others were anticipated to occur simultaneously with the acquisition. In reality, they took months and, in several cases, years. Sometimes administrative costs are projected to fall to zero immediately upon acquisition, assuming that the acquirer's existing administrative staff is able to perform all of the target's needs. This usually does not happen. Virtually always, administrative costs are incurred to administer an enterprise—even if it is fully absorbed into the acquirer.

Moreover, the impact of nearly all other changes was assumed to take place immediately following the time of the transaction. The acquirer, as in many other acquisitions, simply failed to account for the reality of the situation—that changes take time to occur, and the extent and speed of the changes are frequently less than projected. The assumptions bore little relationship to reality. It was as if, with a wave of the wand, revenues would increase and expenses would be cut, new programs implemented and money-losers slashed. Optimism was built into the projections at every turn. When the projections did not materialize and reality set in, the finger-pointing began. The acquirer was unfocused on the key issues of the customer and the market, to the point that the acquirer brought in an executive from an unrelated operation, fleet management, to manage the retailer. Not surprisingly, failure did not take long. While the new management had cost-cutting experience, the sick retailer required leadership focusing on customer needs and market demands.

Such overconfidence and over-optimism, with acquisitions frequently implemented by executives focusing on eloquent vision and mission statements, is reflective of many failed transactions. Often the implementation plan gets short shrift. Yet, it is particularly important during an acquisition or other period of major change that attention to detail and implementation be carefully balanced with the big picture issues of mission and vision.

As long-time observers of both successful and failed corporate acquisitions, all too often we have witnessed value destruction through either transactional myopia or organizational overoptimism. For value to be created, a clear balance between the nitty-gritty of implementation and the strategic vision of the firm must take place. Moreover, the acquirer must step back from the world of overoptimism, and step into a realistic understanding of the firm's cost structure and competitive marketplace.