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Behavioral M&A

Around the turn of the 3rd century BC, the Greek philosopher Epicurus established a doctrine of happiness based on the principles of Hedonism: act to maximize pleasure while minimizing pain.


This very idea was eventually seized by Jeremy Bentham (1748-1832), a British economist who pioneered utilitarianism, a moral theory according to which actions should be judged right (or wrong) depending upon whether they increase (or decrease) human well-being or 'utility'. He invented the ‘Hedonic calculus’ to allow economic actors (incl. governments) to evaluate the net impact of potential acts, assuming that they would rationally pursue those that maximize utility.


Later, another British economist, Richard Jennings (1814-1891), built a comprehensive economic theory based on the same concept, as outlined in his book Natural Elements of Political Economy’ (1855). According to Jennings, pleasure is driven by consumption, while pain is caused by production (labor). Logically, from the relationship between the two, ‘there arise sensations, which are more or less satisfactory, or the reverse; these sensations […] give rise to complex conceptions, in which the objects […] are regarded as more or less valuable.’


Economic value is thus dependent on economic actors’ conscious or unconscious sensations or emotions when considering assets or actions. To economists relying on a purely rational approach to establish economics as a science, this was too much. In the following century, they rebelled and sought to expunge human psychology from economics. To no avail: the integration of psychology returned with a vengeance through ‘behavioral economics’ in the 80s.


In an M&A context, it can be derived from Jennings’ theory that transacting parties would consider consumption (the pleasure of owning an asset) and opportunity costs (the pain of owning an asset) to make investment or divestment decisions. Written by Jennings in a broader context but directly applicable to M&A: ‘The buyer and the seller of [an asset] consider - not, indeed, in reference to their own feelings alone, but also in reference to that wider field of human nature to which their market extends […] - the degrees of satisfaction which will arise from the consumption of existing or of future quantities; on this ground, they act, and by their united acts indicate the Exchangeable Value of [the asset].’


Based on this approach, there is no expectation of future cash flows but expectation of future satisfaction. There is no net present value but a Hedonic calculus seeking to maximize net pleasure. Forget about long-term value creation. Deals are about long-term happiness creation.


However controversial, this perspective has the merit of giving justice to the significant amount of psychology influencing behaviors in transaction processes, with hard-core corporate finance often only providing a broad framework for deals to be negotiated.


As in economics, true M&A is ‘behavioral M&A.

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