 "Information
Asymmetry" is what happens when one party to a transaction has more relevant
information than the other, and doesn't share it. For example, it's what happens to a home
buyer when the inspector misses a patch of mold in the basement, and the seller
doesn't want to risk the deal by volunteering it. I learned about this first hand a few years
ago as I wrote out a check for $7,000 to a basement waterproofing company.
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.
Robert Benjamin is the founder and Principal
Consultant at Hamilton Technology
Management, LLC. Rob specializes in
technology governance, especially for non-IT management. He is also the Northeast Regional
Vice-President of TurnAround LLC, a
Virginia-based consultancy specializing in organizational and operational excellence
for small and medium-sized companies.
[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.
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