Value creation thinking in M&A: the importance of counterfactual thinking

This working paper presents recent research in M&A that counters the prevailing wisdom that companies engaged in M&As often destroy value. Excessive bidder prices for target companies are presented as evidence of this conclusion. This working paper points out that this thinking is faulty and that the logic regarding the value creation or destruction of M&A activities needs to be revised. It presents counterfactual thinking as the basis for accurate value creation thinking and it also underlines the role of obsolescence as a trigger for M&A initiatives. The research further generates a number of conclusions that go against prevailing wisdom in the M&A area. For one, markets are more efficient than commonly perceived. Second, value destruction has two facets, and not just one. Value destruction is not only the consequence of excessive M&A prices or faulty integrations, but should also consider the opportunity costs associated with missed value creating opportunities. Third, in a context of major technological and economic disruption (as triggered by digitalization or the current COVID-19 pandemic), one might expect higher value bids and a greater number to be fully consistent with economic rationality. Fourth, well governed boards must understand that counterfactual thinking allows them to set upper limits to the size of value creating acquisition bids. Finally, counterfactual thinking is also the thinking that ought to drive board decision marking in related settings such as CEO inventives and succession planning, areas known to be responsible for regular value destruction.