How to De-Bias Valuation Over the Cycle
How to De-Bias Valuation Over the Cycle
It is puzzling to note that while companies seem to rush into acquisitions during global economic booms—even when they are aware of the dangers of overpaying—they appear to lose all interest in dealing when the global economy is sluggish and the market invariably offers bargains. Deal framing in executives' analyses—the way they perceive and model their acquisition or divestment opportunities—can cause them to overestimate acquisition opportunities in hot deal markets, while their dismay in cold markets often induces them to frame deals as representing too high risk, so they hold back from making viable new acquisitions or delay divesting loss-making divisions. Decision biases can play surprisingly strong roles in the valuation analyses of even experienced executives. This chapter focuses on this particular problem: how rational analyses can become infected and lead executives to manipulate their analyses to get the answers they expect or require. It proposes a remedy that goes beyond currently applied valuation models.
Keywords: deal framing, acquisitions, investments, valuation analysis, decision bias, rational analyses, deal markets
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