Monday, November 15, 2010
Along the lines of "what were they thinking" - here's Donald Langevoort's new paper on the Behavioral Economics of Mergers and Acquisitions. Too often we are left wondering what CEOs were thinking when they decided to do this deal or that. I'll confess to bemusement following HP's recent tussle with Dell over 3Par, but that's only one example. Langevoort puts M&A decisions under the behavioral microscope.
Abstract: The world of mergers and acquisitions seems like a setting in which rationality necessarily dominates. There are high stakes, focused and sustained attention, and expert advisers who are repeat players. In the economics and management literature, however, there has been a great deal of research on what might be called “behavioral M&A” - using insights from psychology to explain observed patterns of behavior in the acquisitions marketplace. To date, the law has largely been uninterested in the psychological dynamics of corporate acquisitions. This essay looks at recent research on such issues as the role of overconfidence, hubris, anchoring, etc. in explaining buy-side behavior, as well as comparable influences on the sell-side, and argues that there is a plausible case for behavioral explanations for the value destruction that often occurs because of acquirer overpayment and its spillover effects. It then turns to possible legal lessons, and suggests a normative (maybe ideological) account for why courts hold tightly to the assumption of rationality. In the end, the behavioral literature is likely to be more interesting and important to lawyers, directors and others engaged in the practice of M&A than a cause for judicial revisionism.