Information asymmetry has been a principal cause of disastrous mergers, acquisitions, and other business deals since long before Adam Smith was a wee babe. Smith and others talked about the importance of equal knowledge in business dealings to the functioning of a free market. But none analyzed the concept - or what to do about it - in detail. Real analysis had to wait for 20th Century economists like Adolf Berle and Joseph Means[1], George Akerlof[2] and Joseph Stiglitz[3]. Largely as a result of their work, we know a lot more about what it costs to get all the information necessary to make a risk-adjusted decision to buy or sell something of significance.
Buying or selling a company with significant technology assets has always been an "educated crapshoot." In such deals, each side has good reason to believe that the other has shaved the dice, i.e. kept important information from the other. IT deals are the ones most familiar to readers of this journal, but ANY technology-dependent deal can face the same risks.
In 2000, a company my wife worked for, a high-flyer in the world of integrated cable and telephone services, made a company-killing deal based on asymmetric information. It acquired another company on the strength of the latter's service agreements. What it did not take the time or spend the money to discover was that over half of the agreements were due to expire within a year and had a very low renewal rate. And the executives in the company being acquired, who knew the truth, did not share it. In other words, the high flyer transferred a lot of its gold to the hold of a slowly sinking ship. It never recovered while those they bought out made fortunes.
Configuration management would seem like a great process for guarding against asymmetric information in technology deals. After all, if you can examine the documentation for all of the technology assets of a company you are interested in buying, the truth should be easy to discover.
But it's not. If you search the two terms together on the Internet, you will come up with practically no research into the relationship between effective configuration management and risk reduction in technology acquisition.
In reality, many dealmakers fail to employ effective methods and practices for risk reduction for three simple reasons:
- They don't want to spend the time or money to dig into the information in detail
- They have overweening confidence in their own instincts for smelling out a good deal.
- They rely on sources with a self-interest in hiding or shading the truth
This combined misfeasance, malfeasance and nonfeasance has serious consequences for everything from jobs to shareholder value. Over 50% of all mergers and acquisitions cost shareholder value and employee jobs. Post-merger integration problems, especially unanticipated difficulties in integrating badly-documented IT systems, contribute in a big way to these losses. Asymmetric information about the true state of technology assets is, in too many cases, the root cause.
A robust configuration management process for acquisition due diligence can reduce, even eliminate the impact of asymmetric information on complex deals. The cost of acquiring enough information, long an issue, is dropping thanks to the ready availability of configuration information on the Internet.
For example, what if we want to know not only the current status of all software licenses, but the future plans of the software vendors issuing those licenses? Configuration due diligence can seek paper and electronic copies of all licenses and all correspondence related to licenses. It can also seek out the latest information, at very little cost, about the software company's plans to support or retire support for those licenses.
Or suppose we want to know how much time, effort and cost we will need to invest in integrating the acquisition's applications with our own. Searching out information about how well specific releases of each party's software play with each other depends on knowing exactly which releases the acquisition has. Configuration management for acquisition due diligence can seek out not only what the company being acquired knows, but also what users all over the world have experienced about the interplay between specific releases of software.
These are only a few of the potential questions, some of which could be deal breakers, that a robust configuration management process for acquisition due diligence can ask and answer.
Following such a process, especially one performed by an independent due diligence specialist, can make the difference between a successful acquisition and one that costs a lot more, and delivers a lot less, than it should.
References
[1] Berle, A.A. & Means, G.C. (1933) The Modern Corporation and Private
Property (New York, Macmillan)
[2] Akerlof, G.A. (1970) The market for lemons: quality uncertainty and the market
mechanism, Quarterly Journal of Economics, 84, pp. 488-500.
[3] Stiglitz, J.E. (1979) Equilibrium in product markets with imperfect information, American Economic Review, Papers and Proceedings, 69, pp. 339-345.
