The vast majority of acquisitions fail because no one really wants to stop the deal. The Confirmation Bias at work and Warren Buffet’s advice.

A few weeks back I attended a very nice corporate breakfast with senior executives and board members. We had all come to hear about best practices for buying other companies. Buried in the slides, almost as an afterthought, was the phrase “…given that most acquisitions fail”.

I thought the audience would pounce on this statement (most research puts the failure rate at 70% or worse). After all, the executives and directors who approved those acquisitions believed they had engaged the right advisors, employed best practices, and made a sound decision to acquire. The audience at the breakfast should be eager to know why leaders exactly like themselves, the folks at the very top of the corporate hierarchy, have such an abysmal track record!

I was disappointed. Only one attendee made a mild reference to the phrase and, when a member of the panel expanded on the downside risks, his cautions were immediately minimized by an M&A professional. Using audacious spin, the M&A pro redefined ‘fail’ as “…maybe you just don’t get an A plus. Perhaps a B or a C instead.” Had I not been a guest at the breakfast, I might have stood up to boo! Imagine me, a mild-mannered Canadian, booing! ‘Fail’ means that the companies were worse off because of the acquisition. That’s an F.

Seeing What We Want To See

I’m glad I didn’t heckle him (as Will Rogers said: “Never miss a good chance to shut up.”). The M&A gentleman likely believes his spin because he wants it to be true – his standard of living depends on it. This was a perfect example of the Confirmation Bias, one of several forces that combine to overwhelm objectivity and produce the terrible rate of M&A failure.

Confirmation Bias occurs when we want a particular answer to be true, for example, “This acquisition is good for the company.” Generally, everyone on an acquisition team benefits from the deal going through:

• Folks in the company will have larger empires to rule
• M&A advisors receive substantially larger fees
• Other outside advisors will have a larger clients (and more future fees)

Confirmation Bias does not stem from dishonest intent. We are sincerely convinced the acquisition is the right answer because we:

• Seek information to support the deal
• Avoid information sources that could quash the deal
• Re-interpret contradictory information as favorable (e.g. redefining “Fail” as a more respectable grade of B or C)

Buffett’s Advice That No One Wants

In his 2009 letter to shareholders, Warren Buffett addressed the counter-productive fee structure for M&A advisors and concluded:

“Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through.” (page 17)

While I see some unintended consequences in the fee structure Buffet proposes, the message is clear: Boards need at least one advisor truly free from the Confirmation Bias’ grip… but who really wants to take Buffet’s advice if it might kill the deal?

© Dave Wittenberg