Aswath Damodaran: The 7 Deadly Sins In Acquisitions

Johnny HopkinsAswath DamodaranLeave a Comment

In his latest investing session titled – Acquirers’ Anonymous: Seven Steps to Sobriety, Aswath Damodaran discusses the seven deadly sins in acquisitions. Here’s an excerpt from the lesson:

Acquisitions are exciting and fun to be part of but they are not great value creators and in today’s session, I tried to look at some of the reasons. While the mechanical reasons, using the wrong discount rate or valuing synergy & control right, are relatively easy to fix, the underlying problems of hubris, ego and over confidence are much more difficult to navigate. There are ways to succeed, though, and that is to go where the odds are best: small targets, preferably privately held or subsidiaries of public companies, with cost cutting as your primary synergy benefit.

The seven deadly sins are:

  1. Risk Transference: Attributing acquiring company risk characteristics to the target firm
  2. Debt subsidies: Subsiding target firm stockholders for the strengths of the acquiring firm
  3. Auto-pilot Control: The “20% control premium” and other myth…
  4. Elusive Synergy: Misidentifying and mis-valuing synergy
  5. Its all relative: Transaction multiples, exit multiples…
  6. Verdict first, trial afterwards: Price first, valuation to follow
  7. It’ s not my fault: Holding no one responsible for delivering results

You can watch the entire presentation here:

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