Value Creator or Destroyer? Keys to Profitable Outcomes

History is littered with examples, from AOL and Time Warner to Daimler and Chrysler, Kmart and Sears to Bank of America and Countrywide. Although there is a wealth of empirical evidence that shows an 80 percent failure rate for mergers and acquisitions, organizations just can’t seem to stop themselves from trying.

Companies that don’t want to end up as cautionary tales need to take a hard look at why these deals failed, and gain a clear understanding of valuation. But even then, says Wharton finance professor Itay Goldstein, highly intelligent, experienced senior executives make some very bad decisions. He tells participants in Integrating Finance and Strategy for Value Creation it’s often a case of the classic prisoner’s dilemma: cooperation is clearly in the best interests of both parties, and yet otherwise rational executives fall prey to competition that results in serious – and preventable – negative consequences.

Goldstein says these decisions are sometimes the result of managerial biases and those at the top who seek to maximize value for their own agenda rather than for the shareholder. They can also be due to difficult-to-sustain equilibrium. “In some acquisition scenarios, you have two parties who are eyeing a third. They might agree that both would be better off if neither of them acquired the third. But the equilibrium doesn’t last. Both fear the other one will make a move, gaining a competitive advantage that will destroy them, and then they go ballistic.”

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