Creating More Accurate Acquisition Valuations

In “hot” deal markets, executives often overvalue companies they are considering acquiring — and conversely undervalue potential acquisition targets when the economy is weak. Fortunately, there are steps managers can take to adjust deal valuations for these common biases.

Han Smit and Dan Lovallo

Fall 2014

Managers often must make decisions about complex strategic issues, and they are expected to make choices carefully and objectively. A private equity fund manager, for example, may have to decide whether to bid more in a highly competitive auction. A retailer may want to figure out whether to make an acquisition at a time when prices are at or near the top of the cycle. In a different vein, an auto ...