How sure are you that a M&A project will be successful and that it will create value for your company? And, can your company afford a failure? These are questions many top managers often struggle with, as they want to be assured that they take the right decision. And due diligence can avoid costly mistakes.

A great article by Patricia Z, an expert in decision making and due diligence for the Oil and Gas industry, and consultant at Consult 2050.

Oil Industry: Big Bet Decisions

Unlike many other industries, the oil industry makes many so-called ‘big bet’ decisions: Infrequent decisions that have a big financial impact: a deep-water exploration well, a multi-well field development in a remote and hostile location, a corporate acquisition etc.

As these decisions have a big impact on the bottom-line of a company, oil company executives do not just flip a coin to make these decisions: a lot of resources are used to help them make the best possible decision because a bad decision has to be avoided at all costs to reduce the (financial) exposure of the company.

Top management consultancy firms regularly publish their experience and research on decision making. Two recent papers on debiasing and categorizing decisions are very much applicable to decision making in the oil industry, and in particular to Due Diligence (DD) of Mergers and Acquisitions (M&A).

Due Diligence In Action

During the DD phase a multi-disciplinary and often multicultural team comes together to evaluate a M&A opportunity. The results of the valuation are presented to senior management so they can make a decision whether or not to pursue the opportunity.

The due diligence project leader has a very important role to play in this process as she not only has to ensure that the team performs the right valuation work and finishes it within the (often) tight deadlines but also that senior management receives the information it needs to make the best, unbiased decision.

Ensuring Decisions are Unbiased

To ensure that the decisions made are unbiased, the DD project leader has to understand the types of biases made in a M&A situation. Research has shown that companies are (in general) good at making ‘big-bet’ decisions but that ‘investment proposals often reflect so-called action-oriented biases while social and stability biases limit the degree to which the proposals where challenged in a meeting’.

Action-oriented biases include excessive optimism, overconfidence and competitor neglect. These biases can be addressed by the DD project leader by having the DD team include a premortem analysis in its valuation in which alternative scenarios are fully explored to reveal potential implications (the so-called ‘what-if’ scenarios) and by acting as a devil’s advocate.

Due Diligence Decision Making

The DD project leader stands between the evaluation team and the decision makers: At one hand she has to understand all the steps (technical, economic, legal etc.) that have to be taken to evaluate a M&A opportunity and has to check that the information presented to management is a true and unbiased representation of the value of the opportunity. While on the other hand, she has to ensure that the amount of information presented is ‘just right’ and ‘just enough’ for management to make the best decision possible.

To facilitate and improve decision making in the DD phase of a M&A process, the DD project leader should contemplate the following implicit/intangible issues:

• Making the goal of a meeting explicitly clear: is the meeting just for information sharing or will it be a decision-making meeting?
• At every level, ensure the buy-in to the decision made, even if some people disagree with the decision.
• Clear communication on the decision that has been made, by making clear why the decision was made; by making the implications of the decision explicitly clear; and by putting the decision into perspective of the bigger picture.

An additional advantage of clear and reliable communication is that less people have to attend a meeting to hear which decision has been taken and why it has been taken. They can rely on communications to get that information and in the meantime work on value-adding activities.

Value Of Decision Experts

Using decision experts like Patricia, will help top managers to take the right decision, based on a holistic and unbiased view. And this is particularly true for M&A activities where the stakes are high.

Independent experts have the advantage over in-house experts, as they are not influenced by long held views on projects and strategies or politics in a company. They can help to take the right decision based on facts and thus create significant value for your company.

For more information about consultants with decision making and due diligence expertise, please contact [email protected]