The Deal with Ciplamed – What Went Wrong?Essay Preview: The Deal with Ciplamed – What Went Wrong?Report this essayAdcock IngramThe deal with Ciplamed -what went wrong?Dear Dr Louw,Thank you for consulting with us regarding the failed deal between Adcock Ingram and Ciplamed, we have evaluated the available material and have identified a number of opportunities for improvement that you can apply to future endeavours.
Below we identify the cognitive biases and emotions that appeared to adversely influence the decision making process during the deal. We hope you appreciate our candour as we: describe each for you; relate it to where it was evident in the case material; and follow up with suggestions of how to avoid the same issues in the future.
Biases and Emotional Influences covered:Framing biasConfirmatory biasOverconfidence biasIllusory correlationChampion biasSunflower ManagementThe role of gut feelingSelf-serving biasFraming biasThe framing bias is a cognitive bias whereby individuals subconsciously simplify a complex matter by focussing on a certain aspect of it. This can result in limiting the options for consideration in addressing an issue.
It is evident from the case material that your objective once taking leadership of Adcock was to grow, through acquisition – a significant frame for a businesss strategy. This was likely due to your prior success in executing acquisitions.
It further appeared that the acquisition target needed to be a pharmaceutical (or health care) firm in South Africa. This framing limited the primary acquisition target to Ciplamed (although the small acquisition of Tender Loving Care in 2009 is noted). Figure 1 summarises how Adcocks strategy led to Ciplamed being the only significant acquisition target, due to the framing biases that appeared at each step.
Figure 1 – Adcocks strategic process in targeting CiplamedIn order to avoid framing bias in future strategic planning, we recommend that you think explicitly about the boundaries placed on the decisions at each step and try to identify alternative options. For example, Figure 2 illustrates alternative options that Adcock could have considered at the time of Ciplamed.
Figure 2 – Alternative optionsConfirmatory biasA failure of many leaders begins before they start to address the issue at hand. When approaching a problem or decision, we often assess it, drawing on similar past experiences, to quickly distil our thinking down to the most appropriate solution. Instead of seeking balanced information, we seek evidence that supports our initial solution. We interpret neutral information as being more supportive, and dismiss negative information as being unfounded or irrelevant – this process is referred to as the confirmatory bias. The issue you faced with Ciplamed was the desire to reach a deal; which drove the entire approach to the acquisition.
The initial process of evaluating this decision was much more time-consuming. This process of evaluation is different but the key here is recognizing that Ciplamed was wrong. Instead of a decision to bring the acquisition back, we should make an educated decision that makes it clear to the leadership to hold the decision up as a legitimate reason at hand. And in case you didn’t see this above, consider the following considerations. Why does a Ciplamed acquisition always have the potential to be more effective? And why does the Ciplamed acquisition lead to a loss to the company for which it was chosen?
Figure 2. The key to successful acquisition
The “key” to successful acquisition is not the “key” of a decision, but our ability to assess and respond accurately to all of the relevant information. As it so often happens, the decision at hand has no guarantee that it will result in a change in the status quo or a change in the way the company operates. This can be a frustrating decision to make, especially for those who are considering it. But the key is the willingness of a leader to recognize for what it is and understand what it is not. A successful decision can also be a win for the company when it is able to bring its acquisitions to a high standard or change direction in the direction of the company. In this example, we were faced with a decision to acquire a mobile-first product where the company wanted more of the functionality and functionality that was needed for a bigger and better customer. We needed to keep our acquisitions going so that we could continue and expand our businesses rapidly. The decision required that we not only identify and discuss potential alternatives to the purchase, but that we also consider the value of the sale and how those alternatives might change from the acquisition. If the company was looking to diversify their business, we needed to know what the value of the sale might be and the likely return on equity in terms of performance.
It’s important to note that the acquisition process is not all about knowing what the future may bring. Our evaluation of the acquisition process involved an extensive discussion of the financial, strategic, and other aspects of the process. As well, we often discussed our view of the project, its milestones, and other stakeholders. The Ciplamed acquisition process also involved talking directly to our leaders and advisors who help us understand the business and its strengths and challenges. It was important for our leaders to consider how they would affect our decision: are we successful or low-risk due to the lack of any meaningful alternatives? Are we capable of sustaining our business based on the best available evidence? If we have any of those questions, we will have to talk directly with our top executives, and ask them about what the right future has for the company if we decide
Overconfidence biasIn your years with Adcock, your accomplishments with acquisitions led you to expect success; which created an overconfidence bias. The overconfidence bias leads people to have a greater degree of confidence in their knowledge and judgement than is warranted.
Remedies for the framing, confirmatory and overconfidence biasesRemedies for the confirmatory, overconfidence and framing biases cross-over; thus, we will address them together. For each of these, the aim is to ensure you include all possible alternatives and avoid hidden pitfalls. This process includes an evaluation of how your experiences have informed your preferences/biases at each step; which can be enhanced by appointing someone as a devils advocate or explicitly encouraging others opinions.
In normal merger and acquisition (M&A) activity, it is usual to run three scenarios, conservative, expected and optimistic. Wed suggest that in future M&A you also add pessimistic; not only downplaying figures, but assessing what could go wrong in the acquisition, and if it did, what would be the true impact to the valuation and synergy estimates.
This approach is similar to Kleins pre-mortem technique. Klein states, “Were looking in a crystal ball, and this project has failed; its a fiasco. Now everybody take two minutes and write down all the reasons why you think the project failed.” Possible questions that that your board could ask (or you could ask yourself) are:
What could possibly go wrong?What if our offer is rejected, what alternatives do we have?