Acquirers warned of unconscious behavioural biases in M&A decision making
Acquirers are warned to take into account unconscious behavioural bias in M&A decision making following the publication of a white paper by law firm Royds Withy King, PCB Partners and the Business School (formerly CASS) at City University of London.
Research shows that executive decision making in M&A deals can be significantly impacted by behavioural biases. Even the most experienced dealmakers are, ultimately, not entirely rational, with M&A deals bringing out both the best and worst in human behaviour.
The report, The urban myths of M&A: how unconscious biases affect deal success, published at an online conference for businesses leaders and M&A advisers this week, highlights the three most common biases that can ultimately lead to deal failure.
James Worrall, corporate partner at Royds Withy King, said: “Research published in our White Paper points to three key areas of bias that we all need to keep in mind in the context of M&A transactions: overconfidence bias, confirmation bias and the illusion of control.
“All can lead to business leaders making the wrong decisions, but a poll of over 80 business leaders and M&A advisers who joined us for the launch of this report points to overconfidence being the most prevalent bias.”
Overconfidence bias comes into play when decision-makers feel they know how to do a deal because they have what they believe to be excellent experience in having done something similar previously. They ignore advice from experts and data that may suggest the deal will not deliver the projected results.
Professor Scott Moeller, founder and director of the M&A Research Centre at the Business School (formerly CASS) at City University of London and author of the report, said: “CEOs do not get to the top of their organisation by failing. They believe that their success can extend to success to M&A.”
Confirmation bias describes the position where individuals seek information that agrees with their own existing beliefs. Research has shown that this bias is prevalent during the due diligence stages and, says James Worrall, underpins the need for independent advisers.
The illusion of control is particularly important in M&A deals as it points to people’s tendency to overestimate their ability to control outcomes that, in reality, they cannot. An illusion of control can prove disastrous with transactions with a psychology of “we can beat the odds” often resulting in transactions not delivering the anticipated results.
Brett Newland, partner at PCB Partners, said: “Research suggests that around 50% of all deals collapse or fail to deliver the benefits promised. It turns on the flip of a coin. But having advisers who understand these biases and will challenge business leaders will help create successful deals.”
A copy of The urban myths of M&A: how unconscious biases affect deal success visit is available via the Royds Withy King website.
