I had completed a three-year apprenticeship in the investments division of a prominent investment group – reaching the exalted position of Senior Company Analyst. Promotion to Investment Analyst was just around the corner, hopefully.

Then, the opportunity arose to up-sticks and move to another position in another city. The job involved advising a public company on potential acquisition opportunities while reporting to the chief executive. It sounded like a step up, and the pay was somewhat better, so I accepted the job offer.

The reality was somewhat different. The chief executive was charming, which is more than could be said for some of his senior management team. He had just returned from a Harvard Business School Executive Development Programme. The mantra he brought back with him was 2+2 =5. It seems it is still a commonly applied concept today. However: "According to most studies, between 70 and 90 percent of acquisitions fail. Most explanations for this depressing number emphasize problems with integrating the two parties involved." hbr.org, 16 Mar 2020.

So that was the frame he took on board. He may have learnt other essential lessons, but they were not apparent to me.

Fortunately for me, the group's only acquisition ever turned out to be one they made just before I joined. It soon became clear that not all in the garden was rosy. The business vendor was a persuasive entrepreneur who could mesmerise you over lunch with only a paper napkin drawing and his voice. And, he had certainly mesmerised the parent company executive team.

The due diligence that had been done would not have won any prizes. It seems no customer interviews were carried out. And the accounting system was a long way from GAAP.

The first awakening came when we spoke to customers. The company had leased hundreds of early-generation photocopy machines which used photo-sensitive paper to one of the largest retail group in the country. It turned out that the rollers on those machines required paper that fell within very fine tolerances. Because of extremely high import duties, local photo-sensitive paper was substituted. The local paper was several microns thicker. After a few hundred copies had been made, the rollers broke. So, lots of repairs and a very unhappy major customer. That turned out to be the least of our problems.

The accounting system was somewhat arcane, i.e. nobody could understand it. Even when it had been explained on a paper napkin. It included capitalising selling expenses and bringing them back to book as revenues arose. It was a long way from the version of GAAP observed back then.

So, a task force was created, which included yours truly, and we set about analysing the lease portfolio. We had access to an IBM 360 and could have used it, but it would mean including people outside the task force. So, we used programmable calculators. Each lease – and there were hundreds of them – was valued using a calculator, and the resulting numbers were converted into a format that gave us GAAP-compliant figures.

The acquired company marketed a range of such calculators. Some of them were so big you needed two people to lift them. And they were painfully slow by today's standards. It took us days to value every lease in the portfolio. And that's when we got the second big shock – the business had been running at a massive loss and continued to do so. Two surprises down and one to go.

While analysing the leases and compiling a complete record of them, we discovered that it was company practice to make three or four originals. Bank loans had been secured based on the security provided by these leases. And that's when we got the final - triple-hammer - blow. The same leases had been given to different banks as security. This was how the company managed to remain cashflow-positive despite losses. The business was now really down and out.

There were several outcomes:

1. The persuasive entrepreneur suffered no consequences as far as I am aware but was invited to peddle his table napkin skills elsewhere;
2. The secured loans from the banks were quietly retired, and the duplicate leases were retrieved;
3. The trading assets of the acquired company were sold to another profitable subsidiary, where the losses were absorbed;
4. A blanket of secrecy was laid; and
5. In my parting interview with the chief executive - shortly after these events - his final words to me were, "I hope one day you will have a better impression of our company".

Several lessons can probably be drawn – other than not trusting people who draw on paper napkins!

1. Simplistic mantras or frameworks are often dangerous;
2. Proper – in-depth - research when making an acquisition is essential;
3. Making sure that you know what you are measuring is crucial;
4. The senior executive team was very close-knit, and one could argue that some groupthink prevailed. A Devil's Advocate is often vital; and
5. Talking to customers of target acquisition companies before investing is crucial.

My story goes back decades. It is interesting to see, though, that the errors of those days are still perpetuated today. See here from Marsha Lewis of Dealroom.net.