Playing at Acquisitions: Behavioral Option Games

by Han T. J. Smit, Thras Moraitis

Overview

A groundbreaking approach to mergers and acquisitions

It is widely accepted that a large proportion of acquisition strategies fail to deliver the expected value. Globalizing markets characterized by growing uncertainty, together with the advent of new competitors, are further complicating the task of valuing acquisitions. Too often, managers rely on flawed valuation models or their intuition and experience when making risky investment decisions, exposing their companies to potentially costly pitfalls. Playing at Acquisitions provides managers with a powerful methodology for designing and executing successful acquisition strategies. The book tackles the myriad executive biases that infect decision making at every stage of the acquisition process, and the inadequacy of current valuation approaches to help mitigate these biases and more realistically represent value in uncertain environments.

Bringing together the latest advances in behavioral finance, real option valuation, and game theory, this unique playbook explains how to express acquisition strategies as sets of real options, explicitly introducing uncertainty and future optionality into acquisition strategy design. It shows how to incorporate the competitive dynamics that exist in different acquisition contexts, acknowledge and even embrace uncertainty, identify the value of the real options embedded in targets, and more.

Rooted in economic theory and featuring numerous real-world case studies, Playing at Acquisitions will enhance the ability of CEOs and their teams to derive value from their acquisition strategies, and is also an ideal resource for researchers and MBAs.

Product Details

ISBN-13:	9780691176413
Publisher:	Princeton University Press
Publication date:	05/09/2017
Edition description:	Reprint
Pages:	216
Product dimensions:	6.10(w) x 9.20(h) x 0.60(d)

About the Author

Han Smit is professor of corporate finance at Erasmus University Rotterdam. He is the coauthor of Strategic Investment: Real Options and Games (Princeton). Thras Moraitis is a cofounder of X2 Resources, a privately funded mining and metals investment vehicle.

Table of Contents

LIST OF FIGURES vii

LIST OF TABLES ix

PREFACE xi

About This Book xi

Who Should Read This Book? Xii

A New Strategic Valuation Approach as a Bridge between Theory and Practice xiv

Academic Contribution and Features xvi

A Guide through the Book xviii

CHAPTER 1. LEARNING TO SEE, TO ADAPT TO, AND TO VALUE UNCERTAINTY 1

Learning to See Uncertainty 3

Learning to Adapt to Uncertainty 8

Learning to Value Uncertainty 11

Summary 15

PART I. LEARNING TO SEE UNCERTAINTY 17

CHAPTER 2. HOW TO DE-BIAS VALUATION OVER THE CYCLE 19

Problem Diagnosis: Why Acquisitions Occur in Go/No-Go Waves 20

Avoiding Irrational Infection of the Valuation Analysis 22

A Remedy for Uncertainty Neglect: Broaden Your Narrow View 25

Examples of Appropriate Real Options Thinking in Hot and Cold Deal Markets 32

Conclusions 41

CHAPTER 3. PLAYING AT SERIAL ACQUISITIONS: THE CASE OF VODAFONE 43

Six Potential Pitfalls in the Execution of a Serial Acquisition Strategy 44

Can Rational Analysis Discipline Strategy? 57

Dual Valuation of Growth Option Value to Avoid Irrational Infection 61

How to Use Option Games to Overcome Bidding Pitfalls 65

Conclusions 68

PART II. LEARNING TO ADAPT TO UNCERTAINTY 73

CHAPTER 4. STRATEGY AS OPTIONS GAMES 75

Classifying Acquisition Options under Competition 78

Expressing a Buy-and-Build Strategy as an Option Portfolio 81

Competition in the Bidding Game 87

Play Poker against Rivals Who Overshoot or Fall Asleep 93

Conclusions 95

CHAPTER 5. DUAL REAL OPTIONS VALUATION: THE XSTRATA CASE 101

Illustrative Example of the Dual Approach: Xstrata's Journey 103

Bottom-Up Framework: Xstrata's Serial Acquisitions 106

Top-Down Framework for Listed Companies: How Finance Can Enlighten Strategy 112

General Implications and Limitations 117

Conclusions 118

PART III. LEARNING TO VALUE UNCERTAINTY 121

CHAPTER 6. OPTION GAMES VALUATION 123

Designing and Solving an Option Bidding Game 124

Quantifying the Optionality of the Falconbridge Episode 133

Conclusions: How Option Games Can Deliver Their Potential 147

CHAPTER 7. CONCLUSION AND IMPLICATIONS 151

Biases and Options Are Everywhere 152

The Problem: Selected Pitfalls in Acquisition Decision Making 154

The Solution: How Executives Can De-bias Their Acquisition Decisions 158

Selected Implications to Deal Rationally with One's Own Biases,Financial Markets, and "Irrational" Rivals 163

Empirical Evidence 166

Promising Future Research Directions 169

Broaden Your View with Option Games 171

BIBLIOGRAPHY 173

INDEX 185

What People are Saying About This

From the Publisher

"This book brings together the best insights from strategy, corporate finance, and psychology to explore in a real, fine-grained, and practical way how to derive winning acquisition strategies using both real options and game theory to optimally time and leverage investments. It is a must-read for serious practitioners and those aiming to get into the game."—Dan Lovallo, University of California, Berkeley

"Smit and Moraitis are the first to incorporate behavioral biases into a book for M&A practitioners. Accessible yet theoretically rigorous, Playing at Acquisitions subdivides complex strategies into manageable building blocks and illustrates concepts through an in-depth study of a successful multistage acquisitions strategy. Highly recommended for corporate strategists and M&A professionals."—Carliss Y. Baldwin, Harvard Business School

"This accessible book provides important tools to enrich existing valuation techniques and teaches how to deal with economic uncertainty, strategic interaction between economic agents, and behavioral biases. Playing at Acquisitions blends state-of-the-art academic insight with a wealth of practical experience and real-world intuition."—Bart Lambrecht, University of Cambridge

"Playing at Acquisitions enables practitioners to move beyond intuition-based acquisition decisions. It invites readers to explore a series of case studies and real-life examples and guides them through the novel tools that are available to them, as well as the advantages and pitfalls of their use."—P. M. Kort, Tilburg University

Editorial Reviews

"This book presents some practical advice for firms and their investment bankers on how to ‘de-bias' their judgement when making merger and acquisition decisions. . . . Practitioners in mergers and acquisitions should certainly consider adding this book to their existing toolkit."---David Butler, Economic Record


"This book brings together the best insights from strategy, corporate finance, and psychology to explore in a real, fine-grained, and practical way how to derive winning acquisition strategies using both real options and game theory to optimally time and leverage investments. It is a must-read for serious practitioners and those aiming to get into the game."—Dan Lovallo, University of California, Berkeley


"Smit and Moraitis are the first to incorporate behavioral biases into a book for M&A practitioners. Accessible yet theoretically rigorous, Playing at Acquisitions subdivides complex strategies into manageable building blocks and illustrates concepts through an in-depth study of a successful multistage acquisitions strategy. Highly recommended for corporate strategists and M&A professionals."—Carliss Y. Baldwin, Harvard Business School


"This accessible book provides important tools to enrich existing valuation techniques and teaches how to deal with economic uncertainty, strategic interaction between economic agents, and behavioral biases. Playing at Acquisitions blends state-of-the-art academic insight with a wealth of practical experience and real-world intuition."—Bart Lambrecht, University of Cambridge


"Playing at Acquisitions enables practitioners to move beyond intuition-based acquisition decisions. It invites readers to explore a series of case studies and real-life examples and guides them through the novel tools that are available to them, as well as the advantages and pitfalls of their use."—P. M. Kort, Tilburg University

From the Publisher