Think Like a Financial Investor
When deals are announced, financial markets do an uncanny job of accurately predicting the long-term consequences. Before undertaking deals, therefore, acquirers should ask, “What would Gordon Gekko do?” As a rule, financial investors do better deals than
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One of my favorite movie characters is Gordon Gekko, the investor and corporate raider who first appeared in the 1987 film Wall Street. Though Gekko has become a cultural symbol for greed and corruption, as epitomized by his famous “greed is good” speech, the fictional takeover specialist has some redeeming qualities that M&A teams would be wise to emulate. Among other things, Gekko was clearheaded, dispassionate, and single-minded in the pursuit of profit, his dedication to maximizing shareholder value, and his choice of acquisition targets. Everyone remembers the line “greed … is good,” but many forget that before saying this, Gekko chastised Teldar Paper’s management in front of the shareholders for their lavish compensation packages and small ownership stake, and boasted about his own commitment to value creation: All together, these men … own less than three percent of the company…. You own the company. That’s right, you, the stockholder. And you are all being royally screwed over by these … bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes…. In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars.
More important (but less famously) was Gekko’s advice to never get emotional about investments. Given the high stakes involved in many mergers and acquisitions, however, this advice can be challenging to implement. With huge sums riding on deal outcomes, as well as careers, egos, promotions, and the long-term futures of the companies, M&As can be emotion-packed odysseys during which management can lose sight of reality. © The Author(s) 2019 N. Fernandes, The Value Killers, https://doi.org/10.1007/978-3-030-12216-4_4
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Too often, instead of retaining the viewpoint of disinterested, third-party financial investors, deal participants get caught up in the drama. This increases the odds that the transaction will generate more and more momentum until it assumes a life of its own. This, in turn, increases the odds that the “sunk cost fallacy” will kick in—that is, that instead of making decisions based on anticipated synergies and value creation, decisions will become clouded by the “emotional investments” of the participants. They may come to believe that they have traveled too far to abandon the deal now. “I call it being a hostage of the process,” said Michael Jeppesen of Solar A/S Group. “You start to see all the advantages and start to convince yourself that the risks can be managed … that it’s all under control… We’re clearly going to get something we don’t like and we know it’s going to cause problems based on the experiences we have had, but still we continue down that road.”
Most Acquirers Overpay Even when dealmakers lose sight of the original rationale and objectives, financial markets never do. When M&As are announced, the markets do an uncanny (and merciless) job of predicting the long-term consequences. And in most cases, the markets punis
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