SUMMARY

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When to Walk Away From a Deal

When company decided to increase the size of the firm and to increase the earning power of the company, it usually goes for mergers and acquisitions. But the process of acquisition s and mergers are very complex and most of the decisions are made on the data available about the company. This does not mean the verifying the financial data of company is all what is required, but a smart manager has to assess the impact of mergers and acquisition very cleverly and he/she has to understand the impact of these deals on every stakeholder. These stakeholders consist customers, employees and not to mention the shareholders; the owners of the company. Making deals involves glamour, but required effort to identify deal more profitable does not bring fame. This is what so many companies who made deals of acquisition which resulted in non feasible joint ventures. Once the senior management decides to strike a deal, it is really hard to resist and back off the deal. Organizations once make deals; they are more interested in financial statements but are less interested in actual financial standing of company. Companies are required to conduct more in-depth financial analysis before entering any deal which can result in the benefit of both. The diligence process of knowing company's actual financial standing seldom results in the killing of potential deals of acquisition and mergers. The case of Safeway is important to understand the significance of due diligence process. Safeway is a leading US grocery chain. In 998, Safeway decided to acquire Dominick's regional grocer in the area of Chicago. Deal worth around $ 1.8 billion and Safeway evaluated that this deal will increase the sale by 11%. The operating cash flow of Dominick was around 7.5% and it lagged behind 8.4% of Safeway. But somehow CEO of Safeway convinced it stockholders to raise the operating cash flow once it acquire the Dominick. On this assumption deals was closed with a period of five weeks. But the focus of Dominick was on in store café and prepared food which did not match the policy of Safeway of cost discipline and store brand. In result the union of Dominick resisted the cost cutting policies of Safeway. Customers also showed unwillingness to buy the products of Dominick with the label of Safeway and this resulted in the loosing of share of Dominick's products. The deal proved white elephant for Safeway and if Safeway had undertaken the process of due diligence it could have known all these problems which popped up after the deal had been struck.

Bain and company in 2002 conducted a survey from 250 international managers with merger and acquisition responsibilities. Half of the respondents suggested that their process of due diligence has failed to expose major issues and remaining half of the executive found that their standard and targets were dressed up better for the deals. 33% of the respondents were of the view that they overestimated the ...