Playing at Acquisitions
Behavioral Option Games
1st Edition
Published on 28. July 2015
216 pages
978-1-4008-5217-8 (ISBN)
Description
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.
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.
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More details
Edition
Course Book
Language
English
Place of publication
Princeton, NJ
United States
Publishing group
De Gruyter
Target group
Professional and scholarly
Edition type
Digital original
Product notice
Reflowable
Illustrations
1 halftone. 28 line illus.
File size
3,18 MB
ISBN-13
978-1-4008-5217-8 (9781400852178)
Schweitzer Classification
Other editions
Additional editions
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05/2017
Princeton University Press
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Book
01/2015
Princeton University Press
€68.09
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Persons
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.
Content
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
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
