This is the most traditional approach, and it is good so far as it goes. Certainly, it does pay respect to salient—even critical—data. But good numbers can mask weak talent. The acquired company may for all practical purposes have been a one-man show. There may be no backup. That in itself is bad enough, but it becomes even more critical if the front man happens to depart in the aftermath of the acquisition.

There are too many external biasing factors that deserve consideration for the acquirer to simply assume that incumbents truly do deserve full credit for the current set of numbers. A quantitative analysis can be misleading in a variety of ways.

A Product of Good Times

A benevolent economy may deserve most of the credit for the acquired firm’s good financial performance. So the question that deserves thought is whether there is much proof that incumbents can manage a down economy or a post-merger situation successfully.

Short-Term Perspective

Management may be guilty of mortgaging the future to achieve short-term results. Statistics that look good today may have been achieved at tomorrow’s expense.

For example, the financial ledger may look good because there has been no money spent on R&D, capital improvements, and so on. The workforce may have been slashed to cut overhead, but this may have been done at the expense of adequate servicing of the company’s products. And, given time, these sorts of executive decisions could conceivably prove devastating to the firm. Numbers that look good on the surface may actually be fragile evidence of executive talent. Management may have built a house of cards that faces a shaky, uncertain future.

The Hand of Fate

Pure luck may have been on the company’s side. Chance timing may deserve most of the credit, as management simply may have stumbled into good fortune. Or a foolish gamble may have worked, although it never should have been taken.

The trend that has buoyed the financial picture may be about to reverse–for example a fast-growth strategy may be on the brink of corporate wreckage, with financial resources overextended and management capacities strained beyond reason.

Undeserved Credit?

It is possible that good numbers result primarily from the backup strength given by managers or technically skilled individuals who have already left the firm or who probably will leave. Likewise, managers or technical people may have been in slots where their own effectiveness has been masked by the strong or weak performance of another person.

In other words, who really owns the statistics? Who is primarily responsible for the acquired firm’s present financial status? Who has taken up the slack for whom?

A Race with Only One Runner

A quantitatively favorable picture may be the result of little or no competition. And that, of course, can conceivably change.

So long as one has the only grocery store in town, the numbers may look pretty good, but they may say very little about managerial competence. It is interesting to observe how many major corporations have appeared to be well managed until they were confronted with stiff competition from Japanese imports in the form of automobiles, steel, and electronics.

Environmental Forces

Changing markets and changing access to raw materials due to political/governmental forces may cause top management to have numbers that look particularly good or bad. For example, price supports, deregulation, import tariffs, weather, or even war are external forces that can bias a company’s financial picture dramatically without making any valid statement about the caliber of the management team.

False Statistics

Numbers often lie. And they are often manipulated to make top management look better than it should.

For example, the way inventories and facilities are valued, the tax angles that are played, and other accounting shenanigans can present a very misleading picture regarding top management’s true track record.

In his book How to Measure Managerial Performance, Richard Sloma states:

Output from the accounting system, while perfectly acceptable to the public audit firm, may be not only useless to a management performance may be inaccurately measured. The “best” array of measures always includes a “blend” of data, from both outside and within the accounting system.

How versus How Much

Qualitative issues or factors may be more important than quantitative measures. For instance, an executive’s ethics, strategic vision, human relations skills, and so on may deserve more consideration than the numbers he or she can boast. Perhaps the executive swung a $50 million deal by making a $50,000 bribe or achieved impressive market share by stealing trade secrets. It might be that the CEO has an adversarial manner that has enabled him or her to aggressively generate some good financial results thus far, but that will eventually precipitate a strike or lawsuit. In short, you can’t separate the ends from the means.

But all too often, the leaders of an acquired firm are appraised on the basis of quantitative data, the profits, or the bottom line, what the company has shown vis-à-vis earnings, stock prices, and growth in revenues. Parent company executives need to scrutinize the qualitative data on its acquired management team, as this information represents part of the “hidden economics” of the deal.