The Misvaluation Curse in Mergers and Acquisitions

Abstract

When corporate acquirers become self-mystified by an overly optimistic picture of potential merger gains, they end up trapped in high-sided valuations, overbid, and eventually overpay for targets—and so destroy their shareholder's value. But there is a flip side too: pessimistic acquirers who systematically underbid end up consistently bypassing potentially profitable acquisition deals. Both faces of misvaluation are rooted in cognitive biases which, being reflex rather than volitional, are difficult—but not impossible—to curb. We suggest four strategies to dilute the misvaluation curse. © 2016 Wiley Periodicals, Inc.