Decisive: How to Make Better Choices in Life and Work

by Chip Heath

Hayward and Hambrick speculated that executives’ hubris—their confidence that they could work magic with their acquisitions—would lead them to overpay for their targets. The researchers tested this theory by analyzing every large acquisition ($100 million or more) conducted in the public markets during a two-year period, a sample that contained 106 transactions. What they wanted to see was whether the price paid in the acquisition was influenced by three particular factors, all of which would tend to inflate the ego of the acquiring CEO: 1. Praise by the media 2. Strong recent corporate performance (which the CEO could interpret as evidence of his/her genius) 3. A sense of self-importance (which was measured, cleverly, by looking at the gap between the CEO’s compensation package and the next-highest-paid officer—a CEO must think a lot of himself if he’s paid quadruple the salary of anyone else) Hayward and Hambrick were right on all counts. As each of these three factors increased, so did the tendency of a CEO to pay a higher premium for an acquisition. As one example, they found that for every favorable article written in a major publication about the CEO, the acquisition premium paid went up by 4.8%. That’s a $4.8 million boost on a $100 million acquisition! Because of one flattering article! And a second article would inflate it by another $4.8 million. The authors wrote, “It seems some CEOs who pay extremely large acquisition premiums … come to believe thei...