More Mergers and Acquisitions Ahead, Watch Out

This is one I have been telling you to watch for. Look for more M&A activity in 2004. How will your community be impacted by this trend? Some of the deals are going to be bad ones. Watch for them. A recent article in CFO Magazine talks about the "behavioral finance" angle on M&A deals. It talks about the psychology that some CEOs get caught up in pursuing these deals.

With the U.S. economy roaring back to life in the third quarter of 2003, the revival of what economist John Maynard Keynes called the "animal spirits" of investors may be at hand. And that, to some observers, portends an uptick in merger-and-acquisition activity.

Inevitably, however, many companies will make deals that they will come to regret. Study after study shows that most mergers and acquisitions destroy value, at least in the short term. Why do so many acquisitions fail? Experts typically cite a number of reasons—synergies and cost savings that don't materialize, intractable integration problems, insuperable cultural differences, and so on. Acquisitions, they conclude, are inherently risky undertakings.

To those in the field of behavioral finance, however, the fundamental problem is psychological. CEOs who engage in M&A activity, they say, tend to be overconfident. And overconfident CEOs are prone to pursue risky deals, or pay too much (the "winner's curse"), because they overestimate the returns they can produce from an acquisition.