M&A Failure Often Follows M&A Success

  • OverconfidenceThe Find: One successful merger or acquisition may actually make a CEO less likely to find success with M&A decisions in the future.
  • The Source: An article in the "Management Insights" feature in the current issue of "Management Science."
The Takeaway: If your CEO 's last M&A deal was a raging success, that would make you more confident in her future deal making decisions, right? As logical as this conclusion seems, Professors Matthew Billet and Yiming Qian of the University of Iowafound one simple reason to doubt it: overconfidence. CEO's, their research found, suffer from something called the self-attribution bias. Or to put it in day-to-day language, everything good that happens, happens because of skill. Everything bad, because of luck.

CEOs can overestimate the role their skill played in past M&A deals, raising their confidence in future deals and clouding their decision making. One good deal results in a higher likelihood that CEOs will engage in future deals, whether or not those deals are fundamentally destructive to the company. In light of the findings, the researchers advise successful CEOs and their boards to take a cold shower before green lighting further deals. Rather than rushing ahead after a success, executives need to be cautious of their motives and ensure that they are judging the next deal on its own merits. Boards, they stressed, should ensure that any proposed deal is is not justified on the basis of the CEO's prior M&A success.

The Question: Do any real world examples of this phenomenon come to mind?

(Image of overconfidence poster by Simon Davison, CC 2.0)