Mind The Information Gap: Putting New Selection Criteria And Deal Structures To Work In M&A

Many of the problems that confront buyers and sellers in corporate M&A transactions-promising deals that don't get done, risk of overpayment, and surprises that appear during post-acquisition management-can be traced to "information asymmetry," the potential for major differences between what the buyer and seller know about the selling company's prospects and value. This article summarizes the findings of recent research highlighting new tools that can be used by buyers to sharpen their valuations of prospective targets and raise their realized returns on investment.The authors begin by discussing how sellers can use IPO markets-through a practice known as " dual tracking"-to help buyers with the process of price discovery, thereby reducing buyer uncertainty and increasing the odds that a deal will be completed. The article also discusses alternative payment structures that can add value by shifting some of the overpayment risk borne by acquirers to sellers better informed about the prospects for their businesses. Finally, the authors suggest consideration of alternatives to M&A such as strategic alliances that effectively allow buyers to experiment with the assets of the targets before deciding to commit more capital to the investment.