Creating More Accurate Acquisition Valuations Harvard Case Solution & Analysis

The managers should always be ready to tackle complicated strategic issues, and they must be alert to take careful decisions as well. A retailer, for example, is supposed to be vigilant while determining whether to go a growing competitive auction to bid or a manufacturer is expected to decide how further to stay in consecutive decline market where the economy has been facing long term recession. During business at peak, deals mostly settle demanding and expensive, whereas when the economy declines, acquisitions fall out favor and prices slowdown. Traditional capital budgeting methods for valuate and expenses (such as discounted cash flow) could result in overcharging in “hot” deal markets and control pricing in “cold” deal markets. Collecting potential deals under genuine available features theory and behavioral economics, authors Han Smit and Dal Lovallo write, executives may compromise for potential biases. Investor exuberance, the encouraging sentiments of boards and interest by contemporaries can reason executives to underline acquisition opportunities as more catching than they actually are in “hot” deal markets. Loss aversion and limited perspective that does not deal with long-term growing options, meanwhile, can subdue acquisition behavior during “cold “markets. The article concludes to shine the utilization of valuation methods and assist weaken decision biases. Handling acquisition decisions as simple dilemma choices considering on expected cash flows, the authors write, establish a weak dynamic. Since it is unnoticeable for executives to capture their own biases, the authors propose utilizing a formalized structure to de-bias the decision-making team. At first place managers should decide whether they prefer their investment in a “hot” or “cold” deal market (this could easily be suggested by the number of deals), the author suggest having a wider review, assisted by checklist. A proper valuation checklist may help executives affect their natural inclination by focusing on growth option in “hot” markets and relocate it at staging, deferring or recouping their investments. Likewise, a checklist may assist executives shatter their natural focus from short-term risk to long-term growth options in “cold” deal markets.

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