- July 13, 2014
- Posted by: Treadstone Management Partners
- Category: Mergers & Acquisitions
Mergers and acquisitions involve a great deal of uncertainty. The risk involved is substantial. M&A deals are attractive because they often promise higher profits, less competition, or more market share. Unfortunately less important factors often play a central role in the deal process. Emotions and egos have plagued the deal environment for centuries. Studies have shown that over-confident executives are 1.65 times more likely to pursue a merger or an acquisition of another company.1 Below are a few examples of the impact an executive’s ego can have on the deal process. The list is followed by advice on how to help avoid the pitfall of an M&A ego disaster.
Increased Chance of a Diversifying M&A
A diversifying M&A occurs when the target firm is in a different industry than the acquiring firm. These types of M&As are particularly tricky with an especially poor track record.1 A study by professor Ulrike M. Malmendier of the Graduate School of Business at Stanford and Geoffrey A. Tate, an assistant professor of finance at the Wharton School of the University of Pennsylvania illustrated that CEOs with big egos are 2.54 times more likely to pursue a diversifying M&A than those in the control group.1
Faster Negotiations and Higher Bid Premiums
Nihat Aktas, of Emilyon Business School, and Eric de Bodt and Helen Bollaert, each of the Universite Lille Nord de France conducted a study involving the analysis of 1700 CEOs. After identifying the narcissistic CEOs, they found that compared to the less self-centered ones, narcissistic CEOs negotiate M&As much faster before the deal becomes public.2 They also looked at a number of CEOs of the target companies and found that the more self-centered the CEO was, the higher the bid premium he or she was able to get for the company.2
Higher Chance of Overpaying for Acquisitions
A self-centered CEO of the target company is not the only factor that drives up the price of the deal, narcissistic CEOs of the acquiring firm also do their part to increase the price. A study by business school professors Matthew Hayward and Donald Hambrick demonstrated that the greater the ego of the chief executive, the more his/her company tends to overpay for acquisitions; this is most likely due to the CEO’s over-confidence to make positive returns on the deal, even if he/she is fully aware of the overpayment.3
Higher Chance of Failure after the Deal is Complete
Mergers and acquisitions rarely succeed if they are not done for the right reasons. Most CEOs want to be the biggest and the best; they do that by acquiring their competitors and receiving huge bonuses for successful merger deals; being featured in the Wall Street Journal due to a multimillion dollar acquisition doesn’t hurt either.4 That being said, if the main reason for a merger or an acquisition is a glory boost for a power-hungry CEO, it is more likely going to flop.
How to Minimize the Effects of Egos and Personal Goals on the Deal Process
Although personal goals and egos can have detrimental effects on the M&A process, there are a number of tactics which—If used correctly—can drastically limit their effects and give the M&A a much higher chance of success.
Forgive but Don’t Forget
If you had one failed M&A, maybe it just was not meant to be; two failed M&As? You’re doing something wrong. They say failure is a symptom of success, but in order to take advantage of your failures, you can’t avoid the thought of them; in fact, you need to thoroughly analyze them. Go back and look at where your last M&A deal went sour. Evaluate your decisions and admit when you were wrong. Most importantly, figure out why you were wrong and learn from it.3
Beware of too much agreement in the board room. It’s not a bad idea to assign someone the role of devil’s advocate. Better yet, try to poke holes into your own arguments. Agreeing with someone is nice, but if two people always agree with each other, isn’t one of them redundant? 3 In order to examine all sides of a particular decision, you need people challenging that decision. Bottom line, your CEOs might like you if are always agreeing with them, but they will like you more if you save them the embarrassment and headache of a failed M&A deal.
Seek Outside Help
An organization, especially one that has never participated in an M&A before, should consider the support of an outside consultant with an extensive track record of selecting and evaluating the business models of potential acquisitions. A consultant’s expertise can also come in very handy when attempting to put together effective post-acquisition management and integration plans that will help make the most out of the investment.5
Figure Out your Options and Know When to Walk Away
In the M&A process, especially if you are the acquirer, never let yourself be pressured into closing any particular deal. If you feel that the costs are getting too expensive or the risks too great, start researching other alternatives to pursue. If you cannot find another way to make the M&A work, or the deal just isn’t making sense to you or anyone of your co-executives, its critical to be able to walk away and to never look back or bear any regrets.5
Set Realistic Expectations and Make Sure Everyone is Onboard
If you fail to set appropriate expectations of an M&A and how they will be measured, you leave that job to your employees, investors, and the business press who will then hold you accountable for those expectations.6 Be very clear and concise when setting your expectations and communicating them to everyone involved as it is very possible for a merger deal to actually be successful and yet not be perceived as successful, simply because the marketplace has set an unrealistic expectation.6
1Hulbert, Mark. “Measuring C.E.O.’s on the Hubris Index.” pages.stern.nyu.edu. NYU, 22 May 2005. Web. 22 May 2014.
2Weisul, Kimberley. “The Disturbing Relationship between Corporate Mergers and the Size of the CEO’s Ego.” cbsnews.com. CBS, 14 Feb. 2011. Web. 22 May 2014.
3Pfeffer, Jeffrey. “Curbing the Urge to Merge Why do companies make acquisitions? Ego plays a bigger role than CEOs admit.” money.cnn.com. CNN, 1 July 2003. Web. 22 May 2014.
4McClure, Ben. “Mergers and Acquisitions: Why They Can Fail.” investopedia.com. Investopia, 15 May 2013. Web. 22 May 2014.
5DePaola, Joe. “Company’s Urge to Merger –Truth Be Told: Its Ego, Panic, Stupidity, Greed, Hubris…; Even Valid Business Reasons.” bizshifts-trends.com. N.p., 5 Sept. 2011. Web. 23 May 2014.
6James, Geoffrey. “How to Execute a Merger.” cbsnews.com. CBS, 6 May 2008. Web. 23 May 2014.