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Psychology of M&A Deals

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Sanjay Bakshi
28 September 2013
Warren Buffett on General Acquisition Behaviour
As our history indicates, we are comfortable both with total ownership of businesses and
with marketable securities representing small portions of businesses. We continually look
for ways to em- ploy large sums in each area. (But we try to avoid small commitments -
"If something's not worth doing at all, it's not worth doing well".) Indeed, the liquidity
requirements of our insurance and trading stamp businesses mandate major investments
in marketable securities.
Our acquisition decisions will be aimed at maximising real economic benets, not at
maximising either managerial domain or reported numbers for accounting purposes. (In
the long run, managements stressing accounting appearance over economic substance
usually achieve little of either.)
Regardless of the impact upon immediately reportable earnings, we would rather buy
10% of Wonderful Business T at X per share than 100% of T at 2X per share. Most
corporate managers prefer just the reverse, and have no shortage of stated rationales for
their behaviour.
However, we suspect three motivations - usually unspoken - to be, singly or in
combination, the important ones in most high-premium takeovers:
Leaders, business or otherwise, seldom are decient in animal spirits and often relish
increased activity and challenge. At Berkshire, the corporate pulse never beats faster than
when an acquisition is in prospect.
Most organisations, business or otherwise, measure themselves, are measured by others,
and compensate their managers far more by the yardstick of size than by any other
yardstick. (Ask a Fortune 500 manager where his corporation stands on that famous list
and, invariably, the number responded will be from the list ranked by size of sales; he
may well not even know where his corporation places on the list Fortune just as faithfully
compiles ranking the same 500 corporations by protability.)
Many managements apparently were overexposed in impressionable childhood years to
the story in which the imprisoned handsome prince is released from a toad's body by a
kiss from a beautiful princess. Consequently, they are certain their managerial kiss will
do wonders for the protability of Company T(arget). Such optimism is essential.
Absent that rosy view, why else should the shareholders of Company A(cquisitor) want to
own an interest in T at the 2X takeover cost rather than at the X market price they would
pay if they made direct purchases on their own? In other words, investors can always buy
toads at the going price for toads. If investors instead bankroll princesses who wish to pay
Psychology of M&A Deals
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double for the right to kiss the toad, those kisses had better pack some real dynamite.
We've observed many kisses but very few miracles. Nevertheless, many manage- rial
princesses remain serenely condent about the future potency of their kisses - even after
their corporate backyards are knee-deep in unresponsive toads.
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All the Other Kids Have One!
Story Told By Warren Buffett
Over time, the skill with which a company's managers allocate capital has an enormous
impact on the enterprise's value. Almost by denition, a really good business generates
far more money (at least after its early years) than it can use internally. The company
could, of course, distribute the money to shareholders by way of dividends or share
repurchases. But often the CEO asks a strategic planning staff, consultants or
investment bankers whether an acquisition or two might make sense. That's like asking
your interior decorator whether you need a $50,000 rug.

The acquisition problem is often compounded by a biological bias: Many CEO's attain
their positions in part because they possess an abundance of animal spirits and ego. If
an executive is heavily endowed with these qualities - which, it should be acknowledged,
sometimes have their advantages - they won't disappear when he reaches the top. When
such a CEO is encouraged by his advisors to make deals, he responds much as would a
teenage boy who is encouraged by his father to have a normal sex life. It's not a push he
needs.

Some years back, a CEO friend of mine - in jest, it must be said - unintentionally
described the pathology of many big deals. This friend, who ran a property-casualty
insurer, was explaining to his directors why he wanted to acquire a certain life insurance
company. After droning rather unpersuasively through the economics and strategic
rationale for the acquisition, he abruptly abandoned the script. With an impish look, he
simply said: "Aw, fellas, all the other kids have one."
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Tata Corus Acquisition - The Thrill of the Chase. . .
In many of these acquisitions, managerial intellect wilted in competition with
managerial adrenaline The thrill of the chase blinded the pursuers to the consequences of
the catch.- Warren Buffett
Tata Corus acquisition - Wikipedia, the free encyclopedia
Timelines
On October 20, 2006, Tata Steel announced that it had agreed to pick
up a 100% stake in the Anglo-Dutch steel maker Corus at 455 pence
per share in an all cash deal, cumulatively valued at GBP 4.3 billion
(USD 8.04 billion).
On November 19, 2006, the Brazilian steel company CSN launched a
counter offer for Corus at 475 pence per share, valuing it at $8.4
billion.
On December 11, 2006, Tata preemptively upped the offer to 500
pence, which was within hours trumped by CSN's offer of 515 pence
per share, valuing the deal at $ 9.6 Billion. The Corus board promptly
recommended both the revised offers to its shareholders.
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On December 11, 2006, CSN announced a formal offer for the
Company at an offer price of 515 pence per Corus Share, valuing the
deal at $ 9.6 Billion.. The CSN Acquisition would also be implemented
by way of a scheme of arrangement and is subject to a pre-condition
that either Corus Shareholders reject the Tata Scheme or the Tata
Scheme is otherwise withdrawn by Corus or lapses. The Corus board
promptly recommended both the revised offers to its shareholders.
Also on December 19, 2006, UK Watchdog the Panel on Takeovers
and Mergers announced that the last date for each of Tata and CSN to
announce revised offers for the Company, should they wish to do so, is
30 January 2007. They also warned that it would begin an auction
procedure if the two remained in competition.
On January 31, 2007 Tata Steel won their bid for Corus after offering
608 pence per share, valuing Corus at $11.3bn
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Before and After
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Spot the Models
1. Envy
2. Deprival Super Reaction Syndrome
3. Low Contrast Effect
4. Overcondence
5. Bias from Commitment and Consistency
6. Authority Bias (auctioneer as expert)
7. Social Proof