4 ms·

> One would think a social psychology effect would be less so in a game between quants One would, but the little I've seen & heard about due dilligence around

by vasco 5y ago

> One would think a social psychology effect would be less so in a game between quants One would, but the little I've seen & heard about due dilligence around M&A (and startup investments for that matter) tells me it's nothing close to "quant". People decide they want to buy something, and then try to get it for a good price, and try to have it so that due dilligence works to reduce the purchase price, while not actually finding anything to block the deal. Perhaps in public company acquisitions there's more sophistication, but I really doubt that.

JumpCrisscross 5y ago
> it's nothing close to "quant" This is accurate. For public companies, the quant part has been calculated by the market. Everything that remains is, almost by definition, in the realm of the irrational, unknowable and/or political (usually at the Board level, though government factors could also be involved).
- sitkack 5y ago
  > quant part has been calculated by the market And then you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market.
  - JumpCrisscross 5y ago
    > you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market. This discussion devolves into useless semantics if we rely on colloquial definitions. In case it wasn't clear, the predictable, explicable parts of a public company's value are generally priced in by the market. (If they're not, we're in a chaotic environment and nobody's doing classic M&A.) It's the other stuff, which we put in a bucket titled "irrational," M&A bankers address. This is why the cash-flow models bankers prepare are largely performative. Every buyer builds their own models. And most of the time, the market does the modeling for them. The part the market can't model, the things one seeks to do with control, is the main attraction. I caveated the comment because private company M&A is different. There, the negotiation does focus on valuation. Quality of assets. Current cash flows. Strength of contracts. Discount rates tied to the actual cost of financing versus an MBA model. While public company M&A dresses financial strengths and weaknesses in the language of partnerships, private company M&A seeks to address political issues (e.g. a senile founder with voting control) through talk of fundamentals.
    - sitkack 5y ago
      Thanks, that makes more sense.
  - skriticos2 5y ago
    Well, the market does follow a set of rules (buy-sell pressure), but it's not necessarily reflective of actual value of a stock. More a heard consensus (which is why we get bubbles). The other side is also not necessarily irrational, but much less deterministic. For example, there is the question if the board even wants to sell, if they like the potential buyer, if they have a vision for the company that aligns with the buyer and some non-tangibles. Charisma projection and speech-craft definitely has an influence too, as has track record. The more factors are in alignment with the board, the closer the price is to the stock value. The more hostile the negotiation, the more it moves away.
    - skriticos2 5y ago
      PS: in the case of Musk and Twitter, which I believe started this discussion.. It's Musk, so you can throw out the book. He just takes the stock value and then tweaks it so that the offer contains 420 because obviously that's his shtick since some time. Wonder if the SEC will ever live that one down.
      - JumpCrisscross 5y ago
        > Musk, so you can throw out the book Musk's Twitter takeover is a textbook LBO transaction. The negotiations were unorthodox. But that's been true of LBOs since the 80s. Usually the bankers were the ones up to the antics; this time it's the principal.
        bjelkeman-again 5y ago
        LBO, Leveraged Byout. I had to look it up. “A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.”
        spoonjim 5y ago
        Textbook except for the size of course. Very few LBOs are above $5 billion.
    - 5y ago
noduerme 5y ago
I took this to apply to common things like buying a house, not M&A, but I think when you get a little emotionally invested in buying something the same concepts apply. Specifically, there's a phase where you've decided you want it already, but now you want to get the best price possible. The people selling it know you already want it, so they have all the leverage unless you're completely willing to walk away. In this scenario, setting an arbitrary target price makes sense, but only if you're completely unwilling to negotiate.
rapht 5y ago
> People decide they want to buy something, and then try to get it for a good price, and try to have it so that due dilligence works to reduce the purchase price, while not actually finding anything to block the deal. Perhaps in public company acquisitions there's more sophistication, but I really doubt that. That's indeed how it works in my experience. Thay's also why, as a seller, you want to invest a lot of time making sure that the due diligence scoresheet will be as clean as possible - because then, there can be no mechanical way for a prospective buyer to lower the price: only their belief against that of other prospective buyers...
xenadu02 5y ago
> People decide they want to buy something, and then try to get it for a good price, and try to have it so that due dilligence works to reduce the purchase price, while not actually finding anything to block the deal Here's a sales secret: this is how most people and businesses buy things most of the time. Key stakeholders (which may not be the big boss) decide they want something then find reasons to justify it. They'll only abandon the deal if there are true blockers either on price or features. And by "big boss" that can be a parent, spouse, Director, CxO, Board, etc. The buyer decides they want a thing and will set about convincing whoever needs convincing. The more you can make them engage emotionally the harder they'll go on securing approval. If you're a startup selling to companies have one or two impressive "wow" features to make people decide emotionally they want your product, even if they don't seem like important "bread & butter" core features. It makes the rest of the process a lot easier. Same goes for selling to consumers or even app videos/screenshots: sell people on your product emotionally within the first 5 seconds if you can.

by vasco 5y ago

JumpCrisscross 5y ago

> it's nothing close to "quant" This is accurate. For public companies, the quant part has been calculated by the market. Everything that remains is, almost by definition, in the realm of the irrational, unknowable and/or political (usually at the Board level, though government factors could also be involved).

sitkack 5y ago
> quant part has been calculated by the market And then you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market.
- JumpCrisscross 5y ago
  > you go on to say "everything that remains is ... in the realm of the irrational", everything you have laid out is in the realm of the irrational. Including the market. This discussion devolves into useless semantics if we rely on colloquial definitions. In case it wasn't clear, the predictable, explicable parts of a public company's value are generally priced in by the market. (If they're not, we're in a chaotic environment and nobody's doing classic M&A.) It's the other stuff, which we put in a bucket titled "irrational," M&A bankers address. This is why the cash-flow models bankers prepare are largely performative. Every buyer builds their own models. And most of the time, the market does the modeling for them. The part the market can't model, the things one seeks to do with control, is the main attraction. I caveated the comment because private company M&A is different. There, the negotiation does focus on valuation. Quality of assets. Current cash flows. Strength of contracts. Discount rates tied to the actual cost of financing versus an MBA model. While public company M&A dresses financial strengths and weaknesses in the language of partnerships, private company M&A seeks to address political issues (e.g. a senile founder with voting control) through talk of fundamentals.
  - sitkack 5y ago
    Thanks, that makes more sense.
- skriticos2 5y ago
  Well, the market does follow a set of rules (buy-sell pressure), but it's not necessarily reflective of actual value of a stock. More a heard consensus (which is why we get bubbles). The other side is also not necessarily irrational, but much less deterministic. For example, there is the question if the board even wants to sell, if they like the potential buyer, if they have a vision for the company that aligns with the buyer and some non-tangibles. Charisma projection and speech-craft definitely has an influence too, as has track record. The more factors are in alignment with the board, the closer the price is to the stock value. The more hostile the negotiation, the more it moves away.
  - skriticos2 5y ago
    PS: in the case of Musk and Twitter, which I believe started this discussion.. It's Musk, so you can throw out the book. He just takes the stock value and then tweaks it so that the offer contains 420 because obviously that's his shtick since some time. Wonder if the SEC will ever live that one down.
    - JumpCrisscross 5y ago
      > Musk, so you can throw out the book Musk's Twitter takeover is a textbook LBO transaction. The negotiations were unorthodox. But that's been true of LBOs since the 80s. Usually the bankers were the ones up to the antics; this time it's the principal.
      - bjelkeman-again 5y ago
        LBO, Leveraged Byout. I had to look it up. “A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.”
      - spoonjim 5y ago
        Textbook except for the size of course. Very few LBOs are above $5 billion.
  - 5y ago

noduerme 5y ago

I took this to apply to common things like buying a house, not M&A, but I think when you get a little emotionally invested in buying something the same concepts apply. Specifically, there's a phase where you've decided you want it already, but now you want to get the best price possible. The people selling it know you already want it, so they have all the leverage unless you're completely willing to walk away. In this scenario, setting an arbitrary target price makes sense, but only if you're completely unwilling to negotiate.

rapht 5y ago

> People decide they want to buy something, and then try to get it for a good price, and try to have it so that due dilligence works to reduce the purchase price, while not actually finding anything to block the deal. Perhaps in public company acquisitions there's more sophistication, but I really doubt that. That's indeed how it works in my experience. Thay's also why, as a seller, you want to invest a lot of time making sure that the due diligence scoresheet will be as clean as possible - because then, there can be no mechanical way for a prospective buyer to lower the price: only their belief against that of other prospective buyers...

xenadu02 5y ago

> People decide they want to buy something, and then try to get it for a good price, and try to have it so that due dilligence works to reduce the purchase price, while not actually finding anything to block the deal Here's a sales secret: this is how most people and businesses buy things most of the time. Key stakeholders (which may not be the big boss) decide they want something then find reasons to justify it. They'll only abandon the deal if there are true blockers either on price or features. And by "big boss" that can be a parent, spouse, Director, CxO, Board, etc. The buyer decides they want a thing and will set about convincing whoever needs convincing. The more you can make them engage emotionally the harder they'll go on securing approval. If you're a startup selling to companies have one or two impressive "wow" features to make people decide emotionally they want your product, even if they don't seem like important "bread & butter" core features. It makes the rest of the process a lot easier. Same goes for selling to consumers or even app videos/screenshots: sell people on your product emotionally within the first 5 seconds if you can.