218 Part 2: Strategic Actions: Strategy Formulation
this acquisition included those of giving Nokia a stronger position in the United States,
creating synergy through cost reductions achieved by eliminating duplicative processes
and operations, and increasing the newly-formed firm’s pricing power, partly as a result of
its size. The reaction to the proposed transaction was generally positive, with one analyst
suggesting that being left to fend for themselves as independent firms and “as subscale
players in a fiercely competitive market (was), arguably, a worse alternative” compared to
completing the acquisition.^51
In spite of the overall positive reaction to the proposed transaction, concerns were
simultaneously raised about how effectively Nokia and Alcatel-Lucent would be able
to complete the integration process. Highlighting this matter, one analyst said that the
implementation of the acquisition would be much “messier” than would structuring
the deal’s finances. Among the issues associated with integration were those related to
the fact that telecommunications’ firms are “notoriously difficult to integrate” and the
need to carefully involve customers with the combined firm’s efforts to integrate the two
firms’ different operating platforms. Given that both firms had been independently try-
ing to restructure prior to the announced acquisition, others wondered if the anticipated
cost savings were overly optimistic.^52 Thus, those involved with integrating Nokia and
Alcatel-Lucent seem to be facing integration-related challenges.7-3b Inadequate Evaluation of Target
Due diligence is a process through which a potential acquirer evaluates a target firm
for acquisition. In an effective due-diligence process, hundreds of items are examined
in areas as diverse as the financing for the intended transaction, differences in cultures
between the acquiring and target firm, tax consequences of the transaction, and actions
that would be necessary to successfully meld the two workforces. Due diligence is com-
monly performed by investment bankers such as Deutsche Bank, Goldman Sachs, and
Morgan Stanley, as well as accountants, lawyers, and management consultants special-
izing in that activity, although firms actively pursuing acquisitions may form their own
internal due-diligence team. Even in instances when a company does its own due dili-
gence, companies almost always work with intermediaries such as large investment banks
to facilitate their due-diligence efforts. Interestingly, research suggests that acquisition
performance increases with the number of due-diligence–related transactions facilitated
by an investment bank, but decreases when the relationship with a particular investment
bank becomes exclusive.^53 Thus, using investment banks as part of the due-diligence pro-
cess a firm completes to examine a proposed merger or acquisition is a complex matter
requiring careful managerial attention.
As noted earlier in the chapter, the due diligence Caterpillar performed prior to
acquiring Chinese firm Siwei was inadequate and ineffective. Although due diligence
often focuses on evaluating the accuracy of the financial position and accounting stan-
dards used (a financial audit), due diligence also needs to examine the quality of the
strategic fit and the ability of the acquiring firm to effectively integrate the target to real-
ize the potential gains from the deal.^54 A comprehensive due-diligence process reduces
the likelihood an acquiring firm will have the experience Caterpillar did as a result of
acquiring Siwei.
Early evidence suggests that French IT services company Cap Gemini S.A. completed
an effective due-diligence process prior to deciding to spend $4.04 billion to acquire
U.S.-based iGate Corporation. At the time, this was the 10th largest acquisition of a U.S.-
based technology firm by a European company. Noting that the deal made sense for both
parties largely because of complementarities in their businesses and the positive nature
of the transaction from a financial perspective, analysts felt that there was a strong fit
between the firms and that the acquisition had a strong strategic rationale for Cap Gemini.