Are you dealing with delusion when you negotiate?
In my book, The StreetSmart Negotiator (Amazom, 2005) I list a number of psychological persuasion traps deal makers fall into. Like it or not, negotiators are not always rational, Dr. Spok like characters.
Minds play tricks on the very best of negotiators. In mergers and acquisitions, the time when negotiators are most vulnerable to mind traps is during the price setting stage - when we are conducting the preliminary due diligence.
Overconfident negotiators often overlook evidence that points to deal problems. They fall victim to what behavioural psychologists call confirmation bias.The very time you need to guard against overconfidence and confirmation bias is during the preliminary due diligence. It is here that you formulate your letter of intent which includes your price range, which you hope will propel the deal forward.
Since deal makers rarely recover from an initial offer that’s too high its a mistake you have to guard against or you’ll make the same fatal mistake as Career Education Corporation (CEC).
In Deal without Delusions (HBR Dec 2007) McKinsey authors Dan Lovallo, Patrick Viguerie, Robert Uhlaner and John Horn highlight the case of CEC paying $245 million - 14 times its annual operating earning for Whitman Education Group in 2003 (the historical multiple in this industry is six to eight times earnings).
CEC executives rationalized the sector was in a phase where high prices were the norm. They weren’t. Prices have fallen back to their historical levels.
Overconfidence coupled with confirmation bias is a fatal mix when acquiring companies. So beware!
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