Why M&A Deals Go Bad
October 8th, 2007Businessweek recently published a really interesting article about why many merger and acquisition deals fail (see When Big Deals Go Bad – and Why). As I have pointed out on this blog (see here and here and here), it’s not simply about the price paid. Other factors are involved – managerial egos, the involvement of interested parties (e.g., lawyers and bankers), and cultural fit between firms in the integration process.
Businessweek writes:
when…grand thinking is applied to the mergers-and-acquisitions arena, disaster often ensues. Multibillion-dollar deals are based on personal relationships and egos, grandiose plans for so-called transformational changes to an industry, and a sense that the new sum will be far greater than all the previous parts…
In previous posts I focused especially on integration difficulties – i.e., how synergies fail to materialize in the integration process. I still believe that most deals fail in integration. However, Steve Rosenbush (the author of this article) recognizes, and rightly so, that there is a human element to deal-making that can lead to their suboptimal formation in the first place.
This is where behavioral economics comes into play.
What we’ve learned from the burgeoning field of behavioral economics is that managers often do not make entirely “rational” decisions. There are certain heuristics that humans use in decision-making and certain biases that seem hardwired into our psyche. These biases are likely to affect the deals managers enact. For example, managers get caught up in the “emotion” of a deal and can end up overpaying in fear of losing out on the target. After all, acquisitions are exciting transactions. Adrenaline kicks in causing managers to get attached to a deal when it might be better to simply walk away. In addition, for good and bad, managers are not lacking in confidence. Sometimes their (over)confidence leads them to put deals together that don’t quite belong.
We’ve known about these issues for some time, and as the article explains:
M&A tends to go awry when well-run orderly deal machines are thrown off kilter by volatility or emotion…”Psychology is a big part of M&A. It’s not all of it, but it’s a big part,” says veteran banker Hal Ritch…
But my kudos to the author for subtly recognizing one oft-overlooked reason why deals go awry – the participation of certain interested parties.
And, of course, the path for much of the wheeling and dealing is well lubricated by fee-hunting bankers and lawyers…It may not hurt that buyers such as Cisco tend to work on their own, without much outside influence from investment bankers.
So let’s use I-bankers as an example (and nothing against I-bankers, I think they perform a valuable societal good, especially when it comes to underwriting and financing deals). But let’s face it, I-bankers generally get paid on a contingency basis (not too much different than real estate brokers). They don’t get paid unless the deal gets done. It is therefore in the best interest of the I-banker to get the deal done, …even if this means putting together a sub-par deal.
I’ve been meaning to write about the influence of I-bankers on the M&A process in more detail. In fact, the sentiment expressed in the Businessweek article has been echoed by more than a few top managers with whom I’ve spoken. But that will have to wait for another day and another post. In the meantime, the lesson for managers is to be cautious when doing deals, especially if interested third parties are involved. Be careful not to pay too much attention to outside parties whispering “sweet little nothings” into your ears. And of course, enjoy the Businessweek article…
