Six Signs of a Bad Acquisition

• Assimilation takes too long -- or not long enough. From its stated plans, it appeared that Daimler-Chrysler would take years to combine all assets and management teams, and it never really happened. On the other hand, some combinations happen too fast. In these cases, the acquiring company is simply disposing of assets, not integrating the best of the acquired company into its business.
  I look for a time frame of about a year. Anything more is too long, anything less is too short, and both will erode value.
• Upscale acquires mainstream, or vice versa. Daimler, an upmarket name, acquired Chrysler, a mainstream name at best. Do upscale companies know how to market mainstream products? Aren't the cultures likely to clash somewhere? Ford (F Quote) and Jaguar have the same issue.

  Marriott's (MAR Quote) acquisition of the tony Ritz Carlton chain goes the other direction. So far it seems to be working out, but only as a result of an exceptional management team -- and I'm sure culture wars have happened behind closed doors there, too.

• No strategy. Mergers just to get bigger and increase scale often don't work. Cost-cutting is not a strategy. We saw a lot of this "strategy" as a rationale for H-P's $18 billion acquisition of Compaq, although there were probably deeper strategic benefits that management just wasn't talking about. And especially in the tech space, there's a temptation to revive dinosaurs -- we see it with Sun Microsystems (SUNW Quote) and Storage Technology, and Alcatel-Lucent (ALU Quote).
• Too much goodwill. Goodwill is the accountant's way of questioning an acquisition. Large goodwill increases suggest there wasn't enough tangible value or that the acquirer paid too much. When newspaper and media player McClatchy (MNI Quote) acquired Knight-Ridder, goodwill increased $2 billion, and so did long-term debt -- not a good combination.
• Lost brands. Occasionally the acquiring company is so focused on its own brand and business that it loses focus on the brand and business value of the acquiree.

  The 1980s BP (BP Quote) acquisition of Standard Oil of Ohio (Sohio) was a case in point. Ohioans and other Midwesterners trusted the Sohio brand and considered it one of their own, while BP was an outsider and was treated that way. J.P. Morgan Chase (JPM Quote) probably also lost some respecting customers when it ditched the Bank One brand.

So remember, not every acquisition works; it's hard to get the most value out of both companies. You have to look at both the big picture and the details.