M&A largest value destroyer in corporate history

Merging is the goal but diverging is often the result

Last week I had a meeting with the CFO of a large B2B company around strategy, transformation, behavioral economics – and M&A. They were considering a latch-on acquisition, which had dropped into their lap and could be the answer to all their questions, but they had some reservations. I had a lot!

Generally, I am a fan of M&A done right. For many years pretty much everything was done wrong. Tom Peters summarized the research on M&A in 2002 as 50-90% value destroying depending on the study focus in his provocative book Reimagine. But companies regularly engaged in M&A activities have since built strong playbooks on both Deal Generation and Due Diligence. The problem? That is only half the story. There are still the steps of Negotiation, Post Merger Integration and for some Exit.

But let’s say you are relatively inexperienced in the M&A game. You have tried it a few times from various chairs over the years. But it is hardly your everyday work. What problems would you then risk, when even the experts only manage +10% success?

*E.g. Robert Cialdinis Authority, liking, scarcity, commitment, social proof & reciprocation

Deal Generation: The most pressing problem in deal generation is our availability bias. We tend to look too narrowly and miss the greatest opportunities. To transcend your tunnel vision, there are several tools depending on the problem:

1) You need a decent scouting process, so you know the relevant players, their market position and assets as well as what an acquisition would mean to you – this process alone will remove a lot of the tunnel vision

2) You must never – ever – only look at a target in isolation. No difficult decision scores top marks on all criteria, so when there is only one option on the table, the decision becomes subjective and the providence of the person at the end of the table. Comparisons tend to minimize that.

3) Use stretch targets – that is targets that cannot be reached by just improving everything a little. In this context it is about only looking for deals that will have an outsized return on investment. And no – that almost never come from administrative synergies only

Due Diligence: Once you move from Deal Generation to Due Diligence something special happens. You commit USD 1-5m depending on the deal size – and you personally commit your career. So, you are powerfully motivated to identify evidence that it is a good idea – or put differently you are at high risk of confirmation bias. There are several tricks to get around this, but here are a few of my favorites:

1) You can use wisdom of crowds here – that is experts are excellent at explaining the past, but they are slightly worse than a chimpanzee with a dart at predicting the future. But the average prediction of 20 average people will get you pretty close

2) You need to predefine your core priorities or decision-making criteria, so you can easily identify characteristics in deals that are positives, negatives and irrelevant. Without this done up front, it is so easy to suddenly see data in a positive light or downplay the negative

3) You may use an external to facilitate a debiased decision – with an iterative and coherent decision making process many errors will be caught – and by ensuring an open dialogue on the data with key decision makers keeping quiet until the end, you avoid everyone stepping into confirmation bias

Negotiation: Now you have finished your Due Diligence and you enter the final negotiations. Needless to say, your confirmation bias is now at maximum speed. But there are actually a bunch of other things you might fall for here like these three:

1) Commitment: When you have already started walking down a certain path, changing course shows the tribe, that you cannot be trusted to do what you say. This is a powerful force to keep you on the path to a deal whether it makes sense or not

2) Social proof: When we are in doubt about a decision, we tend to look around for role models, people we like and the general mood. If everyone else wants to move on to the next discussion point, then we will typically also – even if you have serious doubts about the current topic

3) Reciprocation: When someone offers you something, you feel obliged to return the favor. In negotiations you might even be exposed to “reject – then retreat” – when they have a big ask, you reject and then feel obliged to accept their later smaller ask

Post Merger Integration: Obviously this is a huge area and all your bias groups are at risk. But two issues are almost given: Overconfidence and Emotional bias. You have just been through Deal Generation, Due Diligence and Negotiation, so you are exhausted and nothing can surprise you – you now know everything that is worth knowing about this company and you have a brilliant strategy. Or do you?

1) There is often a major shift from the previous three steps of careful analysis to more day to day execution in Post Merger Integration – or from the analytical system 2 to the more automatic system 1. But Post Merger Integration deserves just as much attention to detail and analytical rigor as the previous steps, if you want your strategy to survive meeting reality

2) Overconfidence comes easily with even a minimum of knowledge, but the good news is that it is also easily dispensed. We tend to estimate costs and customer retention far too positively, so base rates from similar cases can do it – or simply estimate best AND worst case, aiming for somewhere between average and worst case

3) Emotional bias is a lot more difficult – particularly if you are exhausted from months of hard work. Basically, your energy level and your attitude on that day will drive your decisions. If your energy is depleted and you had a bad morning, you are likely going to reject all requests – particularly if they do not fit with your well laid strategy

Exit: Exit in the form of selling the entity again to a new player is not relevant to everyone. But some of the challenges that come with Exits actually also affects everyone else. First and foremost, Loss Aversion risks that you sell winners too early and losers too late. For the companies not exiting, this means that you may stick to your losing strategy too long or declare a winner too early:

1) Pre-committing ideally publicly and in writing to sell-by-prices or close-by-dates is a powerful way to keep you from getting caught up in the moment – whether during a positive or negative development

2) Ask yourself or your management team whether you would reinvest in that business and at what price to test your Sunk Cost bias in case either the sales options or strategy are starting to look sour

3) Run a premortem test on your business or strategy to prepare to be wrong -to assess what are the areas that can go wrong and how can you mitigate them up front

There are many more exciting tricks and tools in the behavioral toolbox, but this should get you started – and if not you are welcome to contact me at brian@behaviouralstrategygroup.com or +45-23103206.

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