The document discusses mergers and acquisitions (M&As) and some paradoxes associated with them. It describes the M&As paradox as involving hubris, winners' curse, agency problems, and game theory dynamics. Managers may overestimate the value of acquisitions due to hubris. Acquirers often overpay due to winners' curse. M&As may not benefit shareholders due to agency problems where managers prioritize their own interests like compensation. Game theory shows how managers feel pressure to follow competitors' actions, fueling merger waves even if deals destroy value. Solutions proposed include separating management and control, performance-based compensation, and government regulation.

1. Mergers & Acquisitions (M&As)
I N Wisnu Wardhana-M&As-IMTelkom
Mergers & Acquisitions (M&As)
Modul VII

2. I N Wisnu Wardhana-M&As-IMTelkom
Modul VII
M&As’ Paradox

3. M&As ‘Paradox
M&As’ Paradox:
Hubris - Winners’ curse-
Agency (Jensen & Meckling)
Game Theory (Prisoner Dilema)
M&As paradox?
I N Wisnu Wardhana-M&As-IMTelkom
Winners’ Curse
Hypothesis of Takeovers
Empirical Evidence
Winner’s Curse Hypothesis of Takeovers
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4. Hubris - Hypothesis of Takeovers
The role of hubris,
The pride of the managers in the acquiring firm, may play in explaining takeovers, the
hubris hypothesis implies that managers seek to acquire firms for their own personal
motives and that the pure economic gains to the acquiring firm are not the sole
motivation or even the primary motivation in the acquisition.
Why managers might pay a premium
for a firm that the market has
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for a firm that the market has
already correctly valued?
Their position is that the pride of management allows them to believe that their valuation is
superior to that of the market. Implicit in this theory is an underlying conviction that the
market is efficient and can provide the best indicator of the value of a firm.
The merger they are doing will be a successful one!

5. Empirical Evidence
it was found that the premium paid by
bidders was too high relative to the
value of the target to the acquirer. The
research on the combined effect of
the upward movement of the target’s
stock and the downward movement
If the announcements of deals caused the target’s price to rise, the acquirer’s to fall,
and the combination of the two results in a net negative effect.
The Hubris
CEO
Self-Important
CEO
Self-Important
Acquisition PremiumAcquisition Premium
Board VigilanceBoard VigilanceCEO
Recent Performance
CEO
Recent Performance
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stock and the downward movement
of the acquirer’s stock does not seem
to provide strong support for the
hubris hypothesis.
The Hubris Acquisition PremiumAcquisition Premium
CEO
Inexperience
CEO
Inexperience
CEO
Media Praise
CEO
Media Praise
MODEL OF CEO HUBRIS AND ACQUISITION
PREMIUMS
Conclusion of scientific research:
mergers and acquisitions have often harmful side effects (they
fail) E.g. profitability and market share growth decrease especially
with regard to bidder (winners’ curse)
Knowing this managers keep starting takeovers
(takeover paradox) WHY?

6. Winner’s Curse Hypothesis of Takeovers
The winner’s curse of takeovers is the ironic hypothesis that
states that bidders who overestimate the value of a target will most likely
win a contest.
This is due to the fact that they will be more inclined to overpay and outbid
rivals who more accurately value the target. This result is not specific to
takeovers but is the natural result of any bidding contest
In a study of 800 acquisitions from 1974 to 1983, it showed that on average
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In a study of 800 acquisitions from 1974 to 1983, it showed that on average
the winning bid in takeover contests significantly overstated the capital
market’s estimate of any takeover gains by as much as 67%
overpayment as the difference between the winning bid premium and
the highest bid possible before the market responded negatively to
the bid
Does the market punish companies that make bad acquisitions?
that companies that make acquisitions that cause their equity to lose
value are increasingly likely to become takeover targets!

7. M&As ‘Paradox
M&As’ Paradox:
Hubris - Winners’ curse-
Agency (Jensen & Meckling)
Game Theory (Prisoner Dilema)
M&As paradox?
I N Wisnu Wardhana-M&As-IMTelkom
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Agency Theory
Agency Problems
Efficiency gains
Solution and recommendation

8. Agency Problems
They arise when the true owners of the company, shareholders, have to elect
directors to oversee their interests. These directors select managers who have a
fiduciary responsibility to run the company in a manner that will maximize
shareholder wealth.
However, managers are human and they may
pursue their own agendas and seek to
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pursue their own agendas and seek to
further their own gains at shareholder
expense.
In doing so, they may not manage the
company in a manner that will maximize
profits.

9. Efficiency Gains
Managers may know that if they generate an
acceptable return, such as ∏min , it would be
difficult for shareholders to mount a successful
proxy fight and demand their ouster.
Given that information on potential profitability
is asymmetric and management is in a much
better position to assess this than shareholders
or even the board of directors, managers may
know that ∏ is possible.
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know that ∏max is possible.
The gap (between ∏max - ∏min ), is the
theoretical gain from eliminating unnecessary
costs and selling the output level where marginal
revenue equals marginal costs.
∏min = Average rate of return in the industry
∏max = Max return
TOTAL COST, TOTAL REVENUES, AND PROFIT
FUNCTIONS
Managers may be following a different agenda, such as seeking to make the
company larger than it optimally should be, so as to maximize their
compensation, because it is well known that larger companies pay higher
compensation to management.

10. Solution and Recommendation
But, further facts ..
Managers act according their own interests
status and luxury
the larger the company the higher the salary (according to scientific
research)
Mergers and acquisitions are often not in the interest of the shareholders but
in the interest of the managers! Paradox?
I N Wisnu Wardhana-M&As-IMTelkom
Thus,
Separate decision management and control in publicly traded
corporations to minimize eliminate agency problem. Since, Decision
management initiation and implementation of a decision, as The
Boards rights. Decision control ratification and monitoring of a
decision, as The Shareholder/Owner rights. to separate decision
management and control is very important, only if those decisions are
combined, will then “Agency Problems” arose and are likely to
significantly reduce the value of the corporation.
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in the interest of the managers! Paradox?

11. Recommendation;
Performance-based compensation systems to better align management
and shareholder goals Corp. Gov.
However, when the various accounting scandals, such as WorldCom,
Enron, and Adelphia arose, critics cited such compensation schemes as
one of the main problems.
In the wake of the subprime crisis it was clear that much of the oversized
Solution and Recommendation – cont’
I N Wisnu Wardhana-M&As-IMTelkom
In the wake of the subprime crisis it was clear that much of the oversized
compensation of executives at large financial institutions that turned in
abysmal performance included large equity grants.
Managers who have a good sense of the difference between between
∏max - ∏min may believe that this difference is sufficiently large to more
than offset the costs of doing the deal and paying the service on the debt
Thus, government & regulator have to interfere in providing
formidable rule, for instance; SOX, IFRS, etc.
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12. M&As ‘Paradox
M&As’ Paradox:
Hubris - Winners’ curse-
Agency (Jensen & Meckling)
Game Theory (Prisoner Dilema)
M&As paradox?
I N Wisnu Wardhana-M&As-IMTelkom
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Game Theory
Concept
Case in Game Theory
Managerial Implication
Game Theory paradox in doing M&As

13. Concept of Game Theory
Game theory,
Is to analyze in greater detail interaction among a set of identifiable rivals, on the
basic economics of value creation and capture, and the effects of competition in the
marketplace.
models strategic situations, or games, in which an individual's success in making
choices depends on the choices of others, is about the mathematical study of
optimizing agents.
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SIMULTANEOUS-MOVE, NONREPEATED INTERACTION
Analyzing the Payoffs, are numbers which represent the motivations of players.
Payoffs may represent profit, quantity, "utility," or other continuous measures
Dominant Strategies, A dominant strategy exists when it is optimal for a firm to
choose that strategy no matter what its rival does.
Nash Equilibrium, a set of strategies in which each firm is doing the best it can,
given the strategies of its rival.
Competition versus Coordination
Mixed Strategies
Managerial Implications

14. Concept of Game Theory – cont’
Suppose Microsoft can produce a
new sophisticated software product.
However, it wants to do so only if
Intel produces high-speed
microprocessors. Otherwise, the
software will not sell. Intel, in turn,
wants to produce high-speed
microprocessors only if there is
popular software on the market that
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popular software on the market that
requires high-speed processing. Is
this a game of competition or
coordination?
Thus, both firms (Microsoft and Intel) benefit if they choose the same option
(both produce and/or both not-produce) that was why this is a game of
Coordination.
From the picture above, we have two equilibrium:
Intel and Microsoft, both Produce their product.
Intel and Microsoft, both Not-Produce their product.
But, the Equilibrium “Produce” is more benefiting for both firms, then Intel and Microsoft
will prefer to produce their product.

15. Concept of Game Theory – cont’
Suppose that Boeing and Airbus are
asked to submit sealed bids on the price
of 10 jet airlines to a foreign national
airline. Both companies doubt that they
will compete in similar ways. Both
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will compete in similar ways. Both
companies can select either a high price
or a low price. Each firm has the capacity
to build all 10 airplanes.
Pay-off:
If one company bids high and the other bids low, the order goes to low
bidder.
If both companies submit the same bid (high or low), they split the order.
game of competition

16. Estimate Pay-Off given the potential actions as well as those of yours and your
competitors.
If a firm has dominant strategy, then FOLLOW it.
Make best estimate of what competitor will do and identify the best action.
Managers often make decisions in circumstances where the
decision is not expected to be repeated and the pay-off depends
on the simultaneous decisions of the parties, be they rival firms,
Managerial Implication – from Game Theory
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on the simultaneous decisions of the parties, be they rival firms,
customers, suplliers, or employees.
For instance:
Making a large investment decision to enter a new
market/industry
Pricing new product
Making an acquisition bid for a firm

17. Managers rather like to follow and loose than take the risk to
do nothing and see the others win …– so follow-…?..
Same game for next company: does not no the motives of his
predecessor and shall follow as well - starting of the merger
wave
Game Theory paradox in doing M&As
I N Wisnu Wardhana-M&As-IMTelkom
The wave will stop in case of no more financial means to
merge
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According to McKinsey:
Failure ~ 61%
Success ~ 23%
Unknown ~ 16%

18. M&As ‘Paradox
M&As’ Paradox:
Hubris - Winners’ curse-
Agency (Jensen & Meckling)
Game Theory (Prisoner Dilema)
M&As paradox?
I N Wisnu Wardhana-M&As-IMTelkom
16

19. M&As Paradox
Nutshell,
Hubris (winners’ curse)
Managers do overestimate themselves
Too optimistic
Agency problems
Mergers and acquisitions are often not in the interest of the
I N Wisnu Wardhana-M&As-IMTelkom
Mergers and acquisitions are often not in the interest of the
shareholders but in the interest of the managers
Game Theory
Managers rather like to follow and loose than take the risk to do nothing
and see the others win – so follow
Same game for next company: does not no the motives of his
predecessor and shall follow as well - starting of merger wave
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20. M&As Tips
Ten M&A-tips from Peter Elverding
(CEO of De Nederlandse Staatsmijnen ~ DNS NV.~Dutch State Mines)
What makes the difference? How to achieve a ‘good’ takeover?
1. Let the cobbler stick to his last. Do what you are good at and nothing
else.
2. Do only strategic takeovers.
3. Make a hit list of the companies you want.
4. Draw the line somewhere.
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4. Draw the line somewhere.
5. Be careful with synergy.
6. Prepare the process of integration long before the start of the
takeover.
7. In case of a takeover you need more people than you think.
8. Start integrating at once.
9. Be transparent on your strategic policy.
10. Buy when the prices are low.
Think about those tips