Numerous studies have shown that roughly two out of three corporate acquisitions fail, as measured by the performance of the stock of the acquiring company. What if those odds could be flipped? What if it were possible to succeed two times out of three and just fail a third of the time?

Our research suggests this is possible. A 20-person team that spent two years investigating 2,500 major corporate failures from the past 25 years found that almost half stemmed from ill-conceived strategies that should never have been pursued. Applying the lessons derived from that research can help executives dodge problems and reshape strategies in ways that greatly increase the chances of success.

The issue is timely because there’s likely to be an awful lot of acquiring over the next few years. That’s because the sort of lull in activity that currently exists has historically been followed by a burst of M&A activity. The severity of the recession may, in fact, mean deal activity will be far greater this time around. The crisis is creating scads of targets, many of which never would have been in play before. And many companies that are available for purchase are especially attractive because they haven’t had time to really deteriorate; they just need a shot of liquidity, and they’ll be good to go again.

But the possible downside is enormous, too. Just ask Bank of America about its $50 billion acquisition of Merrill Lynch. Or ask private-equity fund Bay Harbour Management about its decision to buy the Steve & Barry’s retail clothing chain out of bankruptcy proceedings for $168 million last year, only to announce three months later that it would liquidate the chain. Based on our research, we identified both those deals as flawed at the time they were announced, but it was too late for BofA and for Bay Harbour. (For more on our thoughts on these and other deals, see our blog at blog.billiondollarlessons.com)

The time to get things right is now, not when the deal pipeline starts to fill. That’s because our research found that, once a deal is in the works, it’s hard to stop, even when it’s a bad idea. Companies need to agree ahead of time on the sorts of quality checks and process safeguards that will let them strengthen weak ideas and stop bad ones. In other words, executives can take advantage of the current lull to make sure that, when the deals start flowing again, they can have those two in three odds, not the one in three that have historically prevailed.

In this paper, we’ll lay out a quality assurance process that we call the Strategic Stress Test. Companies should be putting this process in place now, because good deals will make heroes of the acquiring companies and their senior executives while bad deals will sink others.

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The CEO, B. Ramalinga Raju, said his ever-expanding fraud felt to him “like riding a tiger, not knowing how to get off without being eaten.”

But that’s how it always is. Just ask Bernie Madoff, who hasn’t explained himself publicly but who surely started his fraud so small that it didn’t even feel wrong, and intended to keep it manageable. Or ask Enron, MCI, Waste Management or any of the other dozen or so companies we cite in our book as examples of companies that prettied up their numbers just a bit, assuming that whatever problem afflicted them was an aberration and that future growth would let them get back to reporting the real numbers–only to find that each additional quarter required a slightly bigger lie, until finally reaching the point where the tiger ate them.

The lesson is simple: Don’t do it.

Don’t dress up the numbers beyond anything you could defend if you were the subject of a front-page article in the Wall Street Journal. Otherwise, you, too, will learn that frauds don’t stay small and that you will get a chance to see how you look in an orange jumpsuit–or whatever color prison garb is in India.

Flush with cash, Microsoft can afford to offer financing at a time when other sources of credit have just about dried up for many businesses. In fact, the financing will cost Microsoft little. Once Microsoft has paid the huge costs for developing software, producing additional copies costs almost nothing, so even if the vast majority of customers defaulted on their 0% financing Microsoft would still come out ahead.

History does include situations where vendor financing went awry. During the Internet bubble, for instance, communications-equipment makers such as Lucent provided financing liberally to startups that wanted to become customers. Once the bubble burst and the startups failed, the communications companies were left holding billions of dollars of bad loans.

Our research also found instances where companies got themselves in trouble offering credit to retail customers. Spiegel, for instance, thought it was diversifying when it gave customers credit cards so they could buy from Spiegel’s catalog and stores. For a time, Spiegel not only propped up its retail sales but also booked healthy profits from its finance arm. But Spiegel was offering credit to people who couldn’t afford it. Eventually, they defaulted in droves. Spiegel’s retail sales plunged, and the company had to go back and reduce the earnings it had booked on its credit cards. The company filed for bankruptcy protection in 2003.

The Spiegel case is the more relevant to Microsoft. While the minimal production costs limit the downside of lending to finance software purchases, Microsoft could be tempted to provide additional financing for services, related hardware, and so on so it can book those software sales. The services and hardware would require risking real, live cash that Microsoft could lose.

If Microsoft can stay disciplined about the customers who deserve credit, though, then the company may be able to win over customers who were on the fence about whether to buy from Microsoft or from a competitor.

Oddly enough, one of the biggest threats to Microsoft has been “freeware” such as Linux, which has undercut the demand for comparable Microsoft products. This time around, Microsoft may be able to take advantage of the power of “free.”

Take the case of Freddie Mac, the large mortgage finance company that has lost more than $80B, or more than 60%, of its market value since February 2008. Freddie Mac and its CEO, Richard F. Syron, are the subject of an extensive August 5, 2008, NY Times article that explores why the CEO would adopt a ruinous strategy while ignoring repeated recommendations that could have helped avoid the current crisis.

“He said that we couldn’t afford to say no to anyone,” said David Andrukonis, Freddie Mac’s chief risk officer. “Anyone” refers to members of Congress, which pushed Freddie Mac to buy more and more mortgages from low-income borrowers, to encourage affordable housing—even though the mortgages were increasingly risky. Once, the article reports, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers.” Freddie Mac felt the need to maintain congressional support because the federal government’s implicit support was critical to Freddie’s business model, allowing Freddie to borrow money at lower rates than it could have otherwise. “Anyone” also refers to investors. And, in the midst of the real estate bubble, “shareholders attacked the executives for missing profitable opportunities by being too cautious.”

We’re not saying that Syron went along with the madding crowd against his own better judgment. His actions indicate that he just took the wishes of Congress and investors as confirmation of his own point of view. Instead of slowing the firm’s mortgage purchases, Syron accelerated them. Instead of heeding warnings to expand its capital cushion, Syron let Freddie’s safety net shrink. And he got a lot of positive feedback for his approach. The NYT reports that he has collected more than $38 million in compensation since 2003. And Freddie Mac’s stock value climbed by 25% in the six months after Andrukonis’ prescient warnings. The stock was still up almost 10% three years later, just before the implosion.

Our autopsy of many financial engineering failures, such as Freddie Mac’s, concludes that strategists often do not foresee some external circumstance, some occurrence that falls outside recent experience and seemingly reasonable expectations. To avoid getting blindsided, we think companies relying on complex financial engineering strategies must ask whether their strategy can survive storms. We’re not talking about pleasant afternoon showers. Rather we’re talking about dreaded twenty-, fifty-, or even hundred-year floods.

In Freddie Mac’s case, that circumstance was a wide-scale decline in home prices. Could anyone have predicted the timing of such a circumstance? Probably not (except, it seems, for the traders at Goldman). Yet any sustainable strategy must be able to withstand adversity, so strategists must look into the abyss, assess how their designs would perform under harsh conditions, and explicitly decide whether the risk is worth the return. Strategists must debate the true likelihood of a major problem, keeping in mind that humans’ tendency is to underestimate the likelihood of something they’ve never experienced—as NASA designers did when they said the space shuttle Challenger had a 1 in 100,000 chance of exploding, when later calculations found the real odds were more like 1 in 100. Strategists must also identify ways that would let them see a storm coming and identify in advance ways that they might mitigate the damage.

Pressure may still overwhelm judgment, but we’ve found that aggressively looking for potential problems can bolster the case for good sense.

Steve & Barry’s, like the subprime lenders, got all its profits up front, from payments that starved mall operators paid the company to open stores in their facilities. Estimates are that the 276-store clothing chain received hundreds of millions of dollars in such payments over the years, apparently far more than the profits the company recorded. In other words, Steve & Barry’s was losing money on the sales of its inexpensive clothing but camouflaging the losses with onetime payments. The only way to sustain the fictional profitability was to keep opening stores. But how long was that sustainable? Obviously, not long enough.

In our research, we found numerous instances in which companies, such as subprime lenders, became addicted to the fees that they earned from generating loans, from opening stores, etc. or to the gains they produced through accounting tricks. The problem was that they could never stop; once they started down a dubious path, they had to go further and further to keep generating the growth that Wall Street had come to expect.

We’d like to think that the subprime mess, Steve & Barry’s and other examples have taught companies that they need to be certain they are generating sustainable profits, but there are surely other companies out there whose weakness will be exposed in this difficult economy. The only question is: Who’s next?