The Deal with Ciplamed - What Went Wrong?

Adcock Ingram

The 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 bias

* Confirmatory bias

* Overconfidence bias

* Illusory correlation

* Champion bias

* Sunflower Management

* The role of 'gut feeling'

* Self-serving bias

Framing bias

The 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 business's 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 Adcock's strategy led to Ciplamed being the only significant acquisition target, due to the framing biases that appeared at each step.

Figure 1 - Adcock's strategic process in targeting Ciplamed

In 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 options

Confirmatory bias

A 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.

Overconfidence bias

In 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 biases

Remedies 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 'devil's 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. We'd 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 Klein's pre-mortem technique. Klein states, "We're looking in a crystal ball, and this project has failed; it's 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?

* Who