From Proust to M&A (Cont'd)

In ‘From Proust to M&A’ ten years ago, I borrowed from Marcel Proust’s interactions with his grandmother to warn about the halo effect in M&A: when little is known about a target, due diligence gaps are filled with ‘notions’, i.e., extrapolations, preconceived ideas, or even fantasy.

There is more to Proust’s acute sense of human nature and its implications for M&A. In ‘Within a Budding Grove’ (1919), he offered an explanation for the phenomenon of love:

'When we are in love, our love […] radiates towards the loved one, finds there a surface which arrests it, forcing it to return to its starting point. It is this repercussion of our own feeling which we call the other's feelings and which charms us more than on its outward journey because we do not recognize it as having originated in ourselves.’

Love, according to Proust, is about the flattering version of the lover that is seen reflected back by the loved one.

My first reaction as a teenager was to reject this as cynical, leading to an argument with my father. Experience, however, has proved it accurate. Each loved one holds a flattering mirror for their lover.

With his observation, Proust established an example of reflexivity. Later, George Soros developed another one.

In ‘The Alchemy of Finance’ (1987), he introduced the ‘General Theory of Reflexivity.’ According to it, market participants form beliefs, act on those beliefs, and in doing so change the market fundamentals. In other words, the act of pricing changes the fundamentals being priced, making it impossible for prices to converge to an equilibrium.

I see Proust and Soros complementing each other: first, something is desired because its association with it flatters and shapes the self; then, that desire reshapes the thing that is desired.

It suggests that a company falls in love with an M&A target because a deal would reinforce its self-image. For example, a legacy industrial business buying a high-tech firm is not just making a strategic move; it is acquiring the right to see itself as a ‘tech company.’ That is the Proustian leg: love as a mirror.

Once the deal is announced, the Soros leg kicks in. Being sought after changes the target itself. The very fact of being bought by a strategic acquirer enhances its perceived value, lifts its peers, and feeds a broader rerating of the industry segment in which the target operates. This, in turn, flatters the acquiror even more.

M&A deals change the identity of both the acquiror and the target. If love is about shaping two entities for the better, then M&A is its expression in the corporate world.