Mergers and Acquisitions: Escalation of Commitment Bias

Escalation of engagement is understood to mean a process leading to actors (who have long been engaged in the conduct of a project), losing their analytical skills by speeding up the conclusion of the agreement, beyond all objective reasons (Jemison and Sitkin1986). This bias is all the stronger as the efforts agreed by the group (in terms of resources mobilized), the buy-in and support of the main components of the organization, the involvement of the staff, make it difficult to justify the lack of implementation (Haspeslagh and Jemison 1991). The latter occurs when more effort and impetus are given to a project following bad signs (Coulon &Wolf, 1980; Staw, 1976; Staw & Ross, 1978; Whyte, 1986) with the view of preventing these signs from damaging the effective realization of a project on which the actors have to spend significant time and resources. M&A Managers have external and internal influence from society, peers, and employees, which can significantly alter their perception on what factors realistically matter when making decisions.

The evaluation phase of the M&A process tends to create a dynamic within the management teams, which often makes it impossible for the managers to turn back from the deal, even if their intuition calls for caution (Self-justification theory). Due diligence is a process of verification, investigation, or audit of a potential deal to confirm all relevant facts and financial information. It allows the buyer to verify anything else that was brought up during an M&A deal. By gathering this information (debts, leases, long-term customer agreements, employment contracts...), the buyer feels better equipped to close the deal with a sense of certainty. But the activity of making a good decision does not protect from failure. Sometimes, rather than creating rationality, due diligence creates false beliefs. The critical spirit disappears in favor of collective dynamics. M&A Managers act irrationally but align with previous decisions and actions (cumulative prior investment). They become attached to the transaction, by eliminating the other strategic alternatives. They become proud of seeing their company's colours paraded before a mass audience. Enthusiasm and "the will to do well" take precedence over lucidity and clairvoyance. The takeover project can, in this way, be continued despite its lack of pertinence (Staw & Ross, 1978) and the appearance of negative information (Caldwell & O’Reilly, 1982).

Avoiding these mind traps (cognitive bias) is quite difficult as they are unconscious processes. M&A Managers can limit their negative effects if they acknowledge they are subject to them. It is important to remain calm in an emergency situation and take a step back from the risk of acceleration and precipitation.

Olivier Meier is Professor of Universities, HDR of exceptional class, Director of the ASAP Observatory “Social Action and Public Action” – chair “Public Innovation” in collaboration with Sciences Po and Polytechnique. He is responsible for Master 2 and Bachelor's degree programs and teaches strategy and management at the University of Paris Est, Paris Dauphine and Sciences Po Paris. Research Director at LIPHA Paris Est, he is a Visiting Professor at the European Center of Harvard Business School and an associate researcher at the ESSEC Chair on managerial innovation and operational excellence. He is also a member of the scientific committee of the Prevention of risks & Performance Chair at CentraleSupelec. His research work focuses on corporate strategies, intercultural management and the contribution of sociology to the analysis of innovation processes.

He is the author of some sixty articles and thirty books on management. He has received several scientific awards, including the Best Paper Award from the Fondation Paris Dauphine (Cercle de l’innovation) and the Best Article Award published in the Family Business Review for his study entitled “The early succession stage of a family firm: exploring the role of agency rationales and stewardship attitudes”, awarded by the Family Firm Institute in Chicago (USA). He is an elected member of the National Council of Universities (2 mandates) and was appointed “Expert HCERES” to the High Council for the Evaluation of Education and Research. He also holds decision-making positions in several university bodies (UFR Management Board, Scientific Committee, Departmental Council, Statutes Commission, etc.) and was a project manager for the Presidency of the Université Paris Est.

Olivier MEIER is also Director of collections at Management & Société.