Whenever a bank loses a fortune thanks to the bad assets acquired in a merger deal, you have to wonder if the acquirer's board of directors was AWOL during due diligence.

And when I hear those unbelievable complaints - for example, that the acquirer has belatedly discovered that the acquired organization had no credit control system - I have got to ask: Why didn't they find this out before they made the offer?

Of course, the failure is not always on the buying side. Sometimes it is the seller that has put in too little legwork - as in the horror stories of family-owned banks that were sold for the stock of a large acquirer only to see that stock plummet after the deal has closed. (Of course, you can always sell the stock once you get it - but only one person at a time can get through that fire door.)

Why do we have such poor due diligence in bank acquisition deals?

Sometimes it is because the buyer is blinded by the desire to do the deal. When the people sent to do the evaluation of the target know that their own senior management and their board of directors want this deal to go through, they hesitate to find fault with it. And if the problems are too glaring not to notice, they may just withhold the bad news - out of fear that they would be penalized for delivering it.

This is dangerous. The people you send to perform due diligence must feel that they have complete liberty to honestly report what they find.

Another reason due diligence often fails is because the numbers given by both sides are misleading - sometimes deliberately. This problem is detailed by the analyst Lawrence Cohn of Ryan, Beck & Co. in a report titled "First Let's Kill All the CFOs."

Then, of course, there are the investment bankers, who know that their fee is dependent upon finding the proposed deal valid.

It is a rare investment banker indeed who will issue a report scotching a deal when he knows that his fee will be 20 or 30 times more if he gives it the green light. And the brass at the acquiring bank usually listen - because they're being told what they want to hear.

Don't let these things happen to you. Don't let laziness turn your bank into another horror story. Don't rush blindly into a marriage that cannot be annulled.

Mr. Nadler, an American Banker contributing editor, is a professor of finance at Rutgers University Graduate School of Management in Newark, N.J.

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