The Misvaluation Curse in Mergers and Acquisitions

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