Playing at Acquisitions

Playing at Acquisitions: Behavioral Option Games

HAN SMIT
THRAS MORAITIS
Copyright Date: 2015
Edition: STU - Student edition
Pages: 216
https://www.jstor.org/stable/j.ctt9qh0nc
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  • Book Info
    Playing at Acquisitions
    Book Description:

    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 Acquisitionsprovides 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 Acquisitionswill 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.

    eISBN: 978-1-4008-5217-8
    Subjects: Business, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. LIST OF FIGURES
    (pp. vii-viii)
  4. LIST OF TABLES
    (pp. ix-x)
  5. PREFACE
    (pp. xi-xxii)
  6. CHAPTER 1 LEARNING TO SEE, TO ADAPT TO, AND TO VALUE UNCERTAINTY
    (pp. 1-16)

    Suppose there are two types of CEOs who differ in how they approach their investment decisions. The first we call thedesigners.¹ These executives have a clear view of their desired competitive positioning and of the means and metrics of success in their chosen competitive playing field, and intend to design and execute premeditated strategic paths. The others—namedopportunists—may also have a clear view of how value is created in their chosen playing field, but are not committed to a master plan, preferring instead to continuously take advantage of any opportunities that fit their value criteria as they...

  7. PART I. LEARNING TO SEE UNCERTAINTY

    • CHAPTER 2 HOW TO DE-BIAS VALUATION OVER THE CYCLE
      (pp. 19-42)

      In 2000–2001, overexuberant valuations at the peak of the market induced decision makers to frame deals for “new economy” (dot-com and telecom) targets as desirable.¹ Similarly in 2007, private equity funds competed heavily in company auctions, their bids bolstered by high leverage. In contrast, the fall in public financial markets in 2008 initially led some observers to predict a burst of M&A activity, in which cash-rich companies would snap up undervalued businesses. Paradoxically, that never came to pass.

      It is puzzling that companies seem to rush into acquisitions during global economic booms—even when they are aware of the...

    • CHAPTER 3 PLAYING AT SERIAL ACQUISITIONS: THE CASE OF VODAFONE
      (pp. 43-72)

      In a period of only a few years in the early 2000s, Vodafone’s then CEO Chris Gent grew the company from a small UK-based mobile operator into the world leader, with over 240 million customers.¹ He did this via a sequence of 26 strategic transactions, including the acquisition of AirTouch, deals leading to the creation of the Verizon wireless business in the United States, a bitter takeover battle for Germany’s Mannesmann, and many Asian alliances such as the China Mobile linkup.

      Today’s economy is characterized by uncertainty, globalization, and the rapid emergence of significant new markets (most notably in China...

  8. PART II. LEARNING TO ADAPT TO UNCERTAINTY

    • CHAPTER 4 STRATEGY AS OPTIONS GAMES
      (pp. 75-100)

      In 1996, the European private equity investor HAL Investments agreed to buy Pearle Benelux, a leading optical chain in Belgium and the Netherlands, and made further acquisitions in the same industry in Belgium and the Netherlands as well as in Germany, Austria, and Italy.¹ Some independent financial buyers work with permanent financing, in which the funds invested and any cash flows generated are available for an unlimited time, enabling them to pursue long-term buy-and-build strategies. In contrast to standard roll-ups and quick restructuring strategies—which typically aim to turn investments around in two to three years—a buy-and-build acquisition strategy...

    • CHAPTER 5 DUAL REAL OPTIONS VALUATION: THE XSTRATA CASE
      (pp. 101-120)

      Until 2001 Xstrata was a nondescript Swiss-listed ferrochrome and zinc business attached to the Glencore metals trading house.¹ The introduction of a new management team under Mick Davis in late 2001 led to a listing on the London Stock Exchange and the subsequent completion of a series of acquisitions, including Glencore’s coal assets (2002); the Australian coal, copper, and zinc group MIM (2003); and (in 2006) the Tintaya copper mine in Peru, a one-third share of the Cerrejón coal mine in Colombia, and the Falconbridge Group in Canada. In only five years, this acquisition journey transformed Xstrata from a $500...

  9. PART III. LEARNING TO VALUE UNCERTAINTY

    • CHAPTER 6 OPTION GAMES VALUATION
      (pp. 123-150)

      Learning to value uncertainty in strategy requires the development of quantitative models reflecting the conceptual options games view on strategy. It is well recognized that when acquisitions generate follow-on growth options, when the economic environment is uncertain, and when competing bidders exist, both discounted cash flow valuation methods and traditional approaches to strategy development need to be extended, if acquisition strategies are to be successfully analyzed, valued, and designed.¹ While an executive team may envision a serial acquisition strategy, executing a premeditated set of transactions is difficult: forces such as uncertainty and competitor preemption can render intended targets unavailable or...

  10. CHAPTER 7 CONCLUSION AND IMPLICATIONS
    (pp. 151-172)

    In 333 BC, while wintering at Gordium, Alexander the Great attempted to untie the Gordian Knot. When he could not find the end of the knot to loosen it he simply sliced it in half with a stroke of his sword, producing the required outcome—an action that has since been referred to as the Alexandrian solution. In this book we seek ways for managers to cut the Gordian Knot to resolve a set of dilemmas—in the broadest sense—facing senior executives when developing their company’s strategy and specifically illustrated here in the context of deciding on and executing...

  11. BIBLIOGRAPHY
    (pp. 173-184)
  12. INDEX
    (pp. 185-192)