Characteristics of Better Acquirers  611 Confirming the Strategic Vision For many companies, the link between strategy and a transaction breaks down during due diligence. By focusing strictly on financial, legal, tax, and opera- tions issues, the typical due diligence fails to bring in data critical to testing whether the strategic vision for the deal is valid. To underpin the strategic impulse behind the deal, companies should bol- ster the usual financial due diligence with strategic due diligence. This entails testing the value creation rationale for a deal against the more detailed infor- mation available to them after signing the letter of intent, as well as seeing whether their vision of the future operating model is actually achievable. A strategic due diligence should explicitly confirm the assets, capabilities, and relationships that make a buyer the best owner of a specific target company. It should bolster an executive team’s confidence that they are truly an advan- taged buyer of an asset. It is critical for executives to be honest and thorough when assessing their advantages. Ideally, they develop a fact-based point of view on their beliefs—testing them with anyone responsible for delivering value from the deal, including salespeople, R&D engineers, and their human resources and finance departments. Such an approach would have helped a large financial company whose due diligence for the deal focused on auditing existing op- erations rather than testing the viability of the future operating models. The advantaged-buyer criteria assumed by the company focused on being one of the most effective operators in the industry, supported by strong IT systems and processes. Executives proceeded with the deal without ever learning that the IT team had a different picture of the eventual end state, and they learned only after close that the two companies’ IT systems could not be integrated. Reassessing Performance Improvement Targets One of the most common but avoidable pitfalls in any transaction is failing to update expectations on performance improvements as the buyer learns more about the target during integration. Companies that treat M&A as a project typically build and secure approval for a company’s valuation only once, dur- ing due diligence, and then build these targets into operating budgets. This forces the organization’s aspirations down to the lowest common denomi- nator by freezing expectations at a time when information is uncertain and rarely correlated with the real potential of a deal. Managing this challenge can be complex but worthwhile. One consumer packaged-goods company boosted run-rate synergies by 75 percent after managers recognized that the target’s superior approach to in-store promo- tions could be used to improve its base business. A pharmaceutical company raised its synergies by over 40 percent in a very large transaction by actively 612  Mergers and Acquisitions revisiting estimates immediately after the deal closed, creating a risk-free en- vironment for managers to come up with new ideas. A few years later, it had captured those higher synergies. Companies can employ various tactics to build a real capability at realizing synergies. They might, for example, bring stakeholders together in so-called value creation summits that mimic the intensity and focus of a due-diligence effort but change the incentives to focus on the upside. And we’ve seen expe- rienced acquirers take a blank-sheet approach to foster creativity, rather than anchor the exercise in a financial due-diligence model, which often leads to incremental synergies. These and similar activities allow companies to rein- force the idea that due-diligence estimates of performance improvements are the lowest acceptable performance, and they get managers used to setting their sights higher. Closing Thoughts Acquisitions are good for the economy when they allocate resources more ef- ficiently between owners. However, most acquisitions create more value for the shareholders of the target company than for those of the buyer, and many destroy value for the buyer’s shareholders. This is perhaps not surprising when we recall that acquisitions can create value for acquirers only if the tar- get company’s performance improves by more than the value of the premium over the target’s intrinsic value that the acquirer had to offer for the target in order to persuade its shareholders to part with it. Managers can help to ensure that their acquisitions are among those that create value for their shareholders by choosing one of the limited number of acquisition archetypes that have created value for acquirers in the past. Success also depends critically on making realistic estimates of the cost and revenue improvements that the target company can realize under new own- ership, taking into account the often-substantial cost of implementing those improvements. Managers should bear in mind that stock markets are interested only in the impact of acquisitions on the intrinsic value of the combined company. Whether an acquisition will increase or decrease earnings per share in the short term has no effect on the direction and extent of movements in the buy- er’s share price following the acquisition announcement. Finally, the best acquirers build systematic institutional skills in defining their M&A strategy, managing their reputation as an acquirer, and consistently looking for performance improvement opportunities beyond those estimated before the deal was complete.