How to Avoid Irrational Decision-Making in M&A

Most people tend to go with their “gut” when making decisions rather than relying on the accurate data. You might think you’re the exception, but studies conducted by psychologists Daniel Kahnerman and Amos Tversky show that “when it comes to decision-making, humans are predisposed to irrationality.”

No one likes to think of themselves in this way, but the truth is that, as human beings, remaining 100% objective is very difficult. Inevitably, through the course of running your business, emotions come into play – as they should since you must have some passion to run a company and be successful. Especially in the thrill of a potential deal, facts can be brushed aside as feelings take over.

While excitement in mergers and acquisitions is important (you’re not a robot), over-reliance on your gut to process decisions can be a recipe for disaster. You need to pay equal attention to the facts in order to be sure of a successful outcome.

So how can we make good decisions and stick to the facts when it comes to pursuing acquisitions?

1. Recognize You are Human

The first step is simple enough: recognize that you are not always objective, and become an observer of your own natural impulses to emotion-driven decisions.

2. Develop Tools

Once you’ve mastered step 1, you can move on to developing tools that will help you remain objective.

Two of the tools we like to use are the Market Criteria Matrix which we use to evaluate and prioritize the best markets and and the Prospect Criteria Matrix, which serves the same purpose for identifying ideal acquisition candidates.

To use the first tool, you start by picking about six key characteristics of the ideal market in which you would want to make an acquisition.

Next, you develop metrics to quantify these criteria. For example, rather than saying your ideal market is a “high growth” market, you might say your ideal market is one that is growing at more than 5% annually. Do this for each of the criteria you’ve identified.

The Prospect Criteria Matrix works in a similar manner, but you develop and quantify criteria specific to company-level data.

By establishing quantifiable metrics to measure your criteria, you eliminate vague and emotionally loaded terms like “good,” “bad,” “large” or “small.”   You also ensure you collect equivalent information on each criterion for each market so that you can make valid side-by-side comparisons.

3. Ask Your Team

Whether it comes from your executive team, your functional leaders, or your third-party advisor, feedback from others helps your broaden your perspective and bring some balance to your decisions. Hearing a different perspective can help you take a second look at the information presented to you and either confirm or invalidate your analysis. Disagreements are sometimes necessary to arriving at the best decision. What matters is that throughout the process, you offset the inescapable impact of emotions with a good measure of fact-based analysis.