Scenario Planning in M&A

Posted on Monday, 1 October 2007. Filed under: Business Intelligence, Commentary, Mergers, Scenario Planning |

An acquisition or merger is difficult to get right, and the other alternatives should be vigorously considered before a deal is contemplated.  Those alternatives include organic growth, strategic partnerships, joint ventures, partial ownership of the target, joint shareholdings, or even ‘doing nothing.’ 

But when acquisition or merger is necessary, it must be entered into carefully and after much consideration – not hastily or only in response to the actions of competitors.  This is a principal premise of our book, Intelligent M&A:  Navigating the Mergers and Acquisitions Minefield, and scenario planning is one very important tool that should be used.  No military planner would even consider going into battle without conducting detailed scenario plans, yet many business leaders will engage in a merger or acquisition without such planning. 

Military and business intelligence techniques can be used in an M&A deal – and not just in the due diligence stage when such techniques have traditionally been employed to uncover confidential information. 

Scenario planning should start at the very beginning when the merger is just an idea floated by the CEO, one of the planning team, or an outside advisor.  It will help to determine if the longer-term future is being properly considered, and not just – as is too often the case – the immediate future where deals are made in response to a recent and short-term change in the market.  At Shell, for example as we noted in an earlier post from May and in our book published in June, their scenario teams are tasked to ‘help charter routes across three interrelated levels:   the Jet Stream of long-term trends, uncertainties, and forces;  the Weather Systems that reflect specific features of key regions; and the Turbulence of market level factors.’  By forcing management to consider all three, they avoid making long-term decisions in response to short-term issues – turbulences.  Shell has kindly put its Jet Stream level scenarios on-line at www.shell.com/scenarios, which benefits those companies not positioned to conduct such macro-level research themselves.

Many CEOs, especially at small and medium-sized companies, find planning a lonely activity at the top of their organization. Most of their managers and indeed the rest of the company is appropriately focused on the conduct of the day-to-day business and therefore not looking much beyond the next sale or production target.  Joint decision-making, brainstorming, and other group planning activities are a luxury unfortunately relegated to at most a few days at an annual off-site meeting.  Consultants can clearly help in this regard, but another tool – straight out of scenario planning and business intelligence – is to use the power of the bookmaker.  There can be great wisdom in the masses, especially when the people in those ‘masses’ have their own hard-earned money at stake.

Where can this be found?  Where people or companies have ‘bet’ on the future, either literally (through bookmakers) or figuratively (in hedging risks in the markets).  The former is useful if the company’s markets are affected by events where there are established betting odds continually updated, which today go well beyond whether Germany will win the next World Cup or the Yankees the World Series.  The futures markets can tell a lot about prices months and years ahead for energy and other commodities including foodstuffs (which give an idea about future weather conditions).  Risk management markets exist in some very unexpected areas affecting business.  Check out www.cantorindex.com and www.intrade.com for some examples. 

As mentioned in another earlier post on scenario planning, to give an idea of just how far these can go, consider that in 2003, a smart – but perhaps insensitive – analyst in the Pentagon proposed setting up a speculative futures market on terrorist attacks.  Nothwithstanding the obvious temptation for real terrorists to be able to financially benefit from their actions, the idea was sound.  Getting people to bet real money on future events focuses the thinking of those people, attracts those who are expert in an area and may actually know more, and saves replication of planning in multiple locations.  

Yes, there really can be wisdom in crowds.  In the right situation, of course, and selectively.  There’s danger in always following ‘conventional wisdom’ and remember that many great idea have been heckled when first proposed.  That’s where leadership comes into play – recognizing when to use the power of scenario planning and when to be ‘bold, daring, and different,’ to paraphrase Anita Roddick, the founder of Body Shop.  

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