Creating More Accurate Acquisition Valuations Harvard Case Solution & Analysis

Managers often must make decisions about strategic issues that are complex, and they are anticipated to make options carefully and objectively. A retailer, for instance, may have to determine whether to offer more in a very competitive auction. Or a producer may want to determine how long to hold onto a money-losing plant as the economy sinks into a downturn. In boom times, deals in many cases are high-priced and in demand (and acquirers tend to understand it); but when the economy cools off, acquisitions fall out of favor and costs decline. Normal capital budgeting approaches for valuing acquisitions and investments (such as discounted cash flow) may result in overpricing in "hot"deal markets and underpricing in "cold"deal markets. Investor exuberance, the favorable thoughts of boards and interest by rivals can cause executives to view acquisition chances as more attractive than they actually are in "popular"price markets. Loss aversion as well as a small outlook that does not consider long term increase alternatives, meanwhile, can subdue acquisition behavior during "cold"markets.

The post was made to help mitigate judgment biases and to improve the utilization of valuation procedures. Treating acquisition decisions as easy go/no-go choices based on expected cash flows, the authorswrite, creates an unhealthy dynamic. Since it is difficult for executives to understand their own biases, the authors suggest using a formalized procedure to de-bias the decision-making team. First, supervisors must decide whether they're confronting an investment in a "hot"or "cold"deal market (something that could frequently be shown by the amount of deals), after which the authors propose taking a more comprehensive perspective, supported by checklists. A valuation checklist can help executives check their natural propensity to focus on growth options in "hot"markets and refocus it on theatrical production, deferring or recouping their investments. Likewise, a checklist can help executives redirect their natural focus from short term threat to long term growth choices in "cold"deal marketplaces.

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