Do you use intuition or spreadsheet analysis?
This Question is a big Dilemma in many merger and acquisition processes. In my own practice as a merger and acquisition consultant, I use a mix of methods to achieve good decision-making.
In the November 15, 2014 FD, Annet Iris (Lecturer at the business school Insead in Fontainebleau) discusses decision-making processes and in particular decision-making in a business acquisition. How to make the right decision and what to base it on.
The author recognizes three approaches: First, the analysis based on hard facts often supported by spreadsheets. The second approach is at the other end of the spectrum, the analyses based on non-hard factors such as suspicions, impressions, feelings and intuition etc. These are also called the soft factors. And the third approach is one in which impressions and feelings are quantified. All methods have advantages and disadvantages. The article does mention a lot of disadvantages with the 2nd and 3rd methods, where decisions are based on the non-hard factors. Nevertheless, the analysis based on non-hard factors is widely used in decision-making in merger and acquisition processes. The reason is simple: Due to the nature of the process, insufficient information is often available.
Take, for example, an acquisition situation where an analysis of a company must often be made in a short period of time. Buyers are hounded because they are in competition – there are more hijackers on the coast. But importantly, they also only get a cross-section of information and have to analyze it in a short period of time. It is also difficult to weigh these facts against similar situations or previous experience when deciding. Companies, markets and organizations are often very different; each acquisition process is different. Moreover, because of the limited information available for a factual analysis, assumptions must often be made, at least certainly about the future. Chances are that the wrong decision will be made because of wrong assumptions.
But it must be said that the other approach is also not without risks. It is very tempting for many people to get distracted by their own emotions (too much self-confidence, fear and greed) in the soft analysis, consciously or unconsciously, and it is very dependent on the experience of the person involved.
In merger and acquisition decision-making, my own preference, as mentioned above, is for a mix of methods. The trick is to find a good balance between the hard facts and things that are less easily captured in a spreadsheet. Impressions and observations gained during conversations, a company visit or negotiations can also provide valuable information. Broad experience helps to arrive at a good comparison of the observed facts and to put everything in the right perspective. To me, at least, this seems better than using spreadsheets alone. Like paper, spreadsheets are patient. And that is also how we should look at them.
Maarten Vijverberg, partner Clifton Finance