Archive for January, 2010

Mergers & Acquisitions and Behavioural Finance

Posted on Monday, 4 January 2010. Filed under: Commentary, Mergers |

I’ve not seen much discussion of the behavioural finance aspects of M&A, so it was refreshing to see this noted in a recent article in Q6, the publication in Fall 2009 of the Yale School of Management (full disclosure:  I am a graduate of the charter class of that school).

In that article entitled ‘What is behavioral?’, Professor of Finance Nicholas Barberis notes that M&A is one of the prime examples of one of the three ‘areas of behavioural finance’:  corporate finance, where he says ‘we’re trying to understand whether managers of firms do things that might be the result of less than fully rational thinking’.  [The italicised emphasis is mine.]   Mergers and acquisitions certainly are an excellent example of this, as they more often than not reduce shareholder (and other stakeholder) value, not increase it.

For your information, the other two areas of behavioural finance are related to asset pricing (that is, how stocks, houses and other assets are priced in the market) and investor behaviour (why people buy certain assets and not others).  Notably, all three of these areas of behavioural finance defy the logic of rational decision-making, not just M&A deals.

But it is the M&A deals that to me are most interesting, of course.  Why do managers insist on doing deals when the deals are not likely to be successful?  There have been numerous studies looking at the drivers to these deals.  One of my students at Cass Business School in a project for Mergermarket (the data providers and subsidiary of the FT Group / Pearson) has recently completed his dissertation looking at these drivers.  In alphabetical order, these drivers are:

  • Communication
  • Culture
  • Deal value
  • Due diligence
  • Financing of the deal (cash vs stock)
  • Frequency of acquisitions / Previous acquisition experience
  • Hubris of management
  • Organisational fit
  • Overpayment
  • Size of the acquirer (relative to the target)
  • Small vs large targets (absolute size of the target)
  • Speed of integration
  • Strategic fit
  • Timing of the acquisition (whether taking place in a bull or bear market, for example)
  • Type of acquisition (domestic vs cross border)
  • Role of leadership

Not all of these are behaviourally related, of course, but you can see that most are and even those that appear not to be (such as deal value or timing) have strong aspects to those factors that will impact behaviours.

Determining which are the most important behavioural factors definitely requires more research.  In my opinion, however, it would appear that (in agreement to many other observers) hubris and management ego / overconfidence is evident in just about every single deal — and no one will argue that this is a ‘behaviour’.  But other areas of behavioural finance also come to play, including the basic human nature of remembering the positive and discounting the negative (from earlier deals) and  believing that ‘this time is different’ and that history won’t repeat itself (which is particularly galling to an amateur historian such as me).

I very much like to see more work on this, would be particularly interested in hearing if there are any new studies on the linkages between behavioural finance and the drivers to M&A deals … or just some observations by any readers.

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Symmetry of M&A in the last Decade (2000-2009)

Posted on Saturday, 2 January 2010. Filed under: Business History, Commentary, Mergers |

The first decade of the new millennium is over.  Happy New Year everyone!  So along with so many other observers of the financial markets, I would like to comment on the past ten years.  Some of these comments have appeared elsewhere – and in fact from me as a number of publications have asked me about my thoughts on M&A in the ‘Noughties’ (including the Financial Times, Financial News, Reuters and Bloomberg).

Most telling I think is how much HASN’T changed:  I like the symmetry of the AOL / Time Warner deal:  10 days into the new year in 2000 the deal was announced and only 9 days into the last month of the decade the deal was unwound.

The new millennium started with the merger of the two companies (it was 10 January 2000 when Steve Case of AOL and Jerry Levin of Time Warner announced the deal) and, in late 2009 on 9 December and less than a month before the decade ended, the two companies finally split up again.  Other deals were bigger, other deals took place first (Vodaphone Mannesmann was a great kick start to the new millennium, wasn’t it).  But nothing bracketed the decade as the AOL Time Warner deal.

That particular merger was actually structured as a purchase of Time Warner by AOL.  Long ago, the AOL name was dropped.  Long ago did shareholders turn away from this deal.  At its peak, AOL had a market capitalisation of around £242 billion.  Now, it has a market value of $3 billion – a staggering loss in value of 98.8%.  It is now run by a former Google exec:  who would have thought a decade ago that a Google man would be running AOL?

That deal did mark the end of the hubris.  We’ll need a few more years to find out, but maybe the 2009 split-up marks the end of the restructuring of the markets and could (along with some other big deals of 2009) be taking place around the time of the resurgence in the M&A market.  That’s the symmetry that I like.

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