Laugh or Cry: Morgan Stanley’s Smith Barney Mouthful

Don’t you just love the story from this week’s Wall Street Journal about the Morgan Stanley gagging on Smith Barney? (Click here to read; registration or subscription may be required.)

Really, how can you not love Wall Street?  What industry generates more money by giving others management advice yet simply cannot manage itself? Merrill? Poof! Lehman? Poof! Drexel? Poof! Solly? Poof! Bear? Poof!

So The Merger Verger was not surprised to learn that Morgan Stanley is choking on its acquisition of Smith Barney.  According to the Journal article, the process of integrating back office IT systems was more complicated than expected!  How pathetic is that?

Do you know what “more complicated than expected” is code for?

“We didn’t do our homework very well beforehand.” That’s what it’s code for. More Wall Street bravado.

Word to the Wise:

When Wall Street comes calling with a great acquisition idea, if you remember nothing about that industry and its history remember this: They have no clue about the role that simple “picking and shoveling” plays in making an acquisition work, not as deal advisors, not as deal doers.  Their advice is about ideas (and fees), not about the practicum of making those ideas work.  Listen, they are smart guys with frequently good advice; you just have to figure out for yourself if following it can be made to work and if so how.

Fun Facts from History:

The illustration on the right is the “tombstone” ad from Ford’s IPO in 1956.  (Click on it for a larger image.) Of the 25 “major bracket” firms listed in the ad, only two remain alive and independent today. (Ironically, Morgan Stanley does not even appear on the list, suggesting that someone there had pissed Ford off in a major way.)

Recommended Reading:

One of the truly great books on Wall Street dates from 1940: Fred Schwed’s, “Where are the Customers’ Yachts?” It will make you laugh and cry!

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Won’t Somebody Please Organize Due Diligence?

I have come to believe that one of the industries that is most in need of consolidation is the Due Diligence Checklist industry.  It makes me want to scream.
 
Listen, if you are creating a due diligence list for publication or broad consumption, unless your list covers the entire equatorial spectrum of possible topics in relatively equal depth, do not imply completeness.  Do not label your document something stupid like “Due Diligence Checklist.”   It’s a lie.  It suggests a level of breadth and thoroughness that is not there.  That is dangerous to people legitimately trying to practice the trade of deal making and acquisition integration.  Grrrr.  You are definitely pissing The Merger Verger off.
 
I recently read an article discussing due diligence for high technology companies, written by a Silicon Valley attorney.  The piece was 18 pages long, of which five were a “due diligence checklist” organized into six categories.

 

Now get this: the section entitled “Financial Condition” had four items listed (I didn’t even have to count them; they were numbered). That’s sure been my experience: round up four or so items of financial data and that part of your due diligence is …

FINISHED!

Beer anyone?

Were that not bad enough, there was nothing – zero – on HR, nothing on corporate practices or culture, nothing on the sweeping Alpine vistas of corporate complexity.

Now, I have no problem whatsoever with a due diligence list that is focused on this aspect of a deal or that aspect. In fact, I think that’s the way it should be.  Just don’t call them more than what they are. It’s a small point; I get that.  But the implications are large.

We – deal makers, all of us, regardless of our specialties – need to be honest with ourselves.  No one of us is capable of producing an All Points due diligence checklist.  And no one should purport to do it.  This is too important a topic not to have our acts together.

Suggested Best Practice:

  1. Create the full sweep of legal, financial, operational, HR, and strategic due diligence procedures (including checklists) founded on specialized expertise from each area.
  2. Keep those procedures and lists organized separately to better enable dedicated teams to focus on the areas of their purview.
  3. When assembling a due diligence list focus on the specific area of your professional expertise and label it simply and honestly, e.g., “Due Diligence Checklist: Human Relations,” or “Legal and Organizational Due Diligence Checklist.”   To do otherwise is a prescription for confusion and incomplete analysis.
  4. In your company’s Integration Handbook, keep distinct due diligence checklists organized by specialty area.  Ensure that all areas are covered by separate lists.  Update those lists during and at the end of each transaction to codify new learning for the future.

I welcome other suggestions on how to manage the process of due diligence.  The effective obtaining and using of thorough corporate information in an acquisition is the absolute cornerstone on which a successful deal is built.  The stronger that cornerstone, the stronger the prospects for your deal’s success.

It is …

just

that

simple.