Motley Fool Money - How Corporations are like Teenagers

Episode Date: March 31, 2020

Companies make thousands of acquisitions each year. Dan Heath, co-author of the New York Times bestseller Decisive: How to Make Better Choices in Life and Work, has a word of warning. The thinking that drives those decisions is the same thinking teenagers use. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finalies of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. With a motley full money extra? I'm Chris Hill. Every year, there are thousands of acquisitions made in the business world.

Across every industry, companies look to grow by buying other companies. How well does that strategy work? Dan Heath, along with his brother Chip, has co-authored some of the most popular business books of the past decade, including decisive how to make better choices in life and work. And unfortunately, as Dan points out, most companies think the way that teenagers, think. So this relates to what psychologists call narrow framing. And the research is just very eye-opening on this. And I think we can all relate to this from our own experience in life, that what people tend to do when they make decisions is they tend to put blinders on and obsess about a single option that's on the table. We call this a whether or not decision.

So when we're struggling with something, for teenagers, it's deciding whether or not to go to the party tonight, whether or not to smoke this thing or not, whether or not to be friends with this person or not, whether or not to send this image over social media. And of course, the flaw with that is obvious that when we're thinking about one option and the only real decision we're making is yes or no, do it, don't do it, we're leaving off all of the spectrum of possibilities that would be available to us. us. And organizations make exactly the same mistake again and again and again. And the research of a guy named Paul Nutt confirms that the percentage of time that organizations make whether

or not decisions is almost indistinguishable from the amount of time. Teenagers do it. And you can see this most vividly in mergers and acquisitions. So the research has been absolutely clear on this for decades. A good rule of thumb is if you're considering acquiring a company, don't. Because the majority of them create no value and in fact roughly half destroy value and this hasn't changed very much but but it still happens there are still companies being acquired still mergers happening and you can understand from the perspective of narrow framing why this happens you know a CEO kind of takes a shine to some

other organization you know maybe it solves a strategic problem maybe it opens up a new opportunity there go the blinders right there's one option on the table the question is do we buy this thing not. And then with every week that passes, notice how the dynamics of that decision change. You know, you're lobbying the board to get behind it. You're starting to socialize the idea with your company. You're starting to figure out how are we going to pay for this. You're starting to make connections at the target. And as time goes by, it's really not even a yes or no decision anymore. Because with one option on the table, no really feels like a failure,

doesn't it? Six months go by. You've been researching this merger nonstop. You've been selling it to your team as the next great thing. You've got your board on, you know, behind you on the bandwagon. And then you're going to back away because it's something you learned. Like, isn't that going to put egg on your face? Are you going to feel kind of sheepish about that? And so you can see these forces kind of conspire to turn what is originally a yes or no decision, which is bad enough into a yes or yes decision. And so that's why you see this phenomenon. of just gross overpayments for acquisitions that everybody outside the fray can see is crazy, and yet CEOs push forward. Just a little something to keep in mind the next time you hear a CEO talking excitedly about their company's latest acquisition. I'm Chris Hill.

Thanks for listening. We'll see you next time.