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The Winner’s Curse is Upon HP and Dell

August 30, 2010 Leave a comment

The world of finance likes to pretend that big deals are driven by rigorous analysis, spreadsheets and efficient negotiations. The truth however is, most deals aren’t any more sophisticated than the frenetic haggling in any Turkish Souk.

Take the ridiculous bidding war between HP and Dell for some obscure pipsqueak of a software company that hasn’t ever made a profit. The ludicrous valuations on offer clearly are not and will never be supported by any objective measurement of value like free cash flow. The prices are going so high simply because neither HP nor Dell wants to back down and lose the bidding war.

This is the primary reason most M&A deals end in failure: buyers pay too much. And when there is a rival bidder, the premium is even more preposterous. The long-suffering analysts who have to keep churning out increasingly implausible post-merger ‘synergy’ scenarios to justify the huge final price are simply the supporting cast in a testosterone-fueled game of ‘my budget is bigger than yours.’

The price paid in any M&A deal is the result of negotiation, and the balance of leverage and desperation between buyers and sellers. Rival bids put the seller in the position of choosy suitor. Like with all things in business, the social psychology of the deal trumps the numbers any day. This is why the winner of the bid has time aplenty to rue their rash enthusiasm.