Having represented many sellers and purchasers of businesses, I have developed some rules of thumb on how to determine whether a merger or acquisition will be successful. 

The most important factors in determining whether an acquisition will work out well are:

(1)   Is the buyer conducting extensive due diligence and working with expert legal and accounting help?  With the help of attorneys, accountants, inspectors and technologists, the acquirer should ascertain that he or she will be receiving what they expect to receive and that there are no hidden liabilities or problems.  In this regard, if the assets being purchased include intellectual property, such as patents, trade marks, copyrights or trade  secrets (almost all acquisitions and mergers do), then it is important that professionals on the buyer's legal team, understand what is required to obtain, protect and transfer those rights.  It is also important that the buyer's representatives have the tax expertise necessary to properly structure the transaction.   

(2)    Is the buyer's management team able to avoid becoming emotionally attached to the deal to avoid paying too much?  The buyer should include in any term sheet or letter of intent that the seller will not continue to negotiate a sale of the business to others until the acquisition is completed or dropped.  Otherwise the buyer could find itself in a bidding war which often results in paying too high a price for the business.

(3)    Are the assets being acquired worth substantially more to the buyer than the seller?  Acquiring a business is expensive and disruptive, and unless the assets are worth much more to the buyer than the seller, assuming each party is correctly estimating the value of the business to that party, it is unlikely that an acquisition will be worth the cost and disruption.  The reasons the assets may be worth more to the buyer may include: 

(a) The buyer has more time, money, energy and/or enthusiasm to put into, or a better understanding of, the business than the seller;
(b) There is a good strategic fit between the business being purchased and a previously owned business that will create efficiencies and savings or increased sales; and/or
(c) The business being acquired is owned by a large company and, although profitable, does not have a market that is sufficiently large to maintain the interest of the current owner, but is a good size for the acquirer.
 
(4)  Probably most importantly, does the acquirer have a management team that can do a very good job operating the acquired business?  Also, if the acquirer intends to add the new business to an existing business, does the management team have the ability and toughness needed to integrate the purchased business with the existing business in an optimal way?
 
At least half of all mergers and acquisitions are not successful .Often, the reason for this is a failure to meet one or more of the above criteria.

Here's my view of some well known completed and proposed mergers and acquisitions:

(1)    HP and Compact - Acquiring another computer company without gaining any advantage like the ability to control the market could not have been beneficial to HP.  The Compact brand name was not helpful and no desired technology was acquired.  Even if Compact's earnings justified the price, which it apparently did not, the cost of the acquisition could not be justified.

(2)     Kmart and Sears - This is not as obviously destined to fail as the merger of HP and Compact, but I would not have done this one either.  There may be some economies of scale from merging two large retailers, but I doubt it's worth the expense, disruption and trouble caused by the acquisition.  These are two tired brands that needed to be rejuvenated.  New décor, new designers, new products could all help, but merging these two giants does not advance any of these goals.

(2)    Delta and Northwest - This one is a good bet.  Delta would gain landing slots at many Asian airports which would probably allow Delta to eventually offer flights from almost any country to another, while the combined company would benefit from Delta's strong management team.  The biggest problems for Delta are the increased cost of fuel coupled with a recession; but those problems are not made worse by the merger.
  
Rob Hassett is an attorney who practices in technology, entertainment and corporate law with Casey Gilson P.C. in Atlanta, Georgia.