Playing at Acquisitions

Han Smit is professor of corporate finance at Erasmus University Rotterdam. He is the coauthor of Strategic Investment: Real Options and Games (Princeton). Thras Moraitis is a cofounder of X2 Resources, a privately funded mining and metals investment vehicle.

• LIST OF FIGURES vii LIST OF TABLES ix PREFACE xi About This Book xi Who Should Read This Book? Xii A New Strategic Valuation Approach as a Bridge between Theory and Practice xiv Academic Contribution and Features xvi A Guide through the Book xviii CHAPTER 1. LEARNING TO SEE, TO ADAPT TO, AND TO VALUE UNCERTAINTY 1 Learning to See Uncertainty 3 Learning to Adapt to Uncertainty 8 Learning to Value Uncertainty 11 Summary 15 PART I. LEARNING TO SEE UNCERTAINTY 17 CHAPTER 2. HOW TO DE-BIAS VALUATION OVER THE CYCLE 19 Problem Diagnosis: Why Acquisitions Occur in Go/No-Go Waves 20 Avoiding Irrational Infection of the Valuation Analysis 22 A Remedy for Uncertainty Neglect: Broaden Your Narrow View 25 Examples of Appropriate Real Options Thinking in Hot and Cold Deal Markets 32 Conclusions 41 CHAPTER 3. PLAYING AT SERIAL ACQUISITIONS: THE CASE OF VODAFONE 43 Six Potential Pitfalls in the Execution of a Serial Acquisition Strategy 44 Can Rational Analysis Discipline Strategy? 57 Dual Valuation of Growth Option Value to Avoid Irrational Infection 61 How to Use Option Games to Overcome Bidding Pitfalls 65 Conclusions 68 PART II. LEARNING TO ADAPT TO UNCERTAINTY 73 CHAPTER 4. STRATEGY AS OPTIONS GAMES 75 Classifying Acquisition Options under Competition 78 Expressing a Buy-and-Build Strategy as an Option Portfolio 81 Competition in the Bidding Game 87 Play Poker against Rivals Who Overshoot or Fall Asleep 93 Conclusions 95 CHAPTER 5. DUAL REAL OPTIONS VALUATION: THE XSTRATA CASE 101 Illustrative Example of the Dual Approach: Xstrata's Journey 103 Bottom-Up Framework: Xstrata's Serial Acquisitions 106 Top-Down Framework for Listed Companies: How Finance Can Enlighten Strategy 112 General Implications and Limitations 117 Conclusions 118 PART III. LEARNING TO VALUE UNCERTAINTY 121 CHAPTER 6. OPTION GAMES VALUATION 123 Designing and Solving an Option Bidding Game 124 Quantifying the Optionality of the Falconbridge Episode 133 Conclusions: How Option Games Can Deliver Their Potential 147 CHAPTER 7. CONCLUSION AND IMPLICATIONS 151 Biases and Options Are Everywhere 152 The Problem: Selected Pitfalls in Acquisition Decision Making 154 The Solution: How Executives Can De-bias Their Acquisition Decisions 158 Selected Implications to Deal Rationally with One's Own Biases,Financial Markets, and "Irrational" Rivals 163 Empirical Evidence 166 Promising Future Research Directions 169 Broaden Your View with Option Games 171 BIBLIOGRAPHY 173 INDEX 185

"This book presents some practical advice for firms and their investment bankers on how to ‘de-bias' their judgement when making merger and acquisition decisions. . . . Practitioners in mergers and acquisitions should certainly consider adding this book to their existing toolkit."---David Butler, Economic Record