455.Paper.Frama-Tech Strategy by Brandon Kampschuur.AUT07

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Unformatted text preview: g for their strategy decision. There was simply not enough time for them to research extensively all available opportunities themselves. They had to choose where to spend their efforts, and their value preferences led them straight to investigating the acquisition alternative. However, major strategic decisions like this one have great implications on the long‐term profitability of the firm, so it might have been worth it for them to purchase more information by, for example, hiring a consultant. Having an outside entity assist them with their strategic decision would also help them to remove the “group think” bias mentioned previously. Step 3: Evaluate and Decide using Logical Reasoning With much information indicating a reasonable likelihood of success for the acquisition alternative and less information to indicate success for the other alternatives, Robert and Dianne focused their decision efforts on deciding whether or not to purchase CEB. Without complete information on the other alternatives, they appeared less attractive to the couple at the decision making time, and therefore it was logical for the decision makers to dismiss these alternatives. As indicated previously, however, this could have resulted in them discarding a potentially better alternative. The evaluation of whether or not to purchase CEB was made using a sophisticated financial model that enabled them to run “what‐if” scenarios on over 50 different variables that spanned ten years into the future. The decision makers used their financial model as manual form of a Monte Carlo simulation; they would adjust the variables and observe how profitability was affected. In this way they gained a rough idea of the sensitivity of various uncertainties to profitability. However, analysis may not have been complete because perhaps not all variable combinations were considered. Further, it is not clear that the financial model they used accounted for all uncertainties, especially difficult to quantify uncertainties such as the lifestyle changes that would result from remote operation of a site in another state. Robert and Dianne looked especially hard at a worst‐case scenario for the acquisition because they wanted to know that they could survive financially if such an event were to occur. Doing so may have been a short‐sighted shortcut by causing them to focus on one worst‐case outcome instead of looking at the broad range of possible outcomes. At the end of their analysis, the decision makers had to arrive at the correct price to offer the owners of CEB. Originally, CEB’s owner wanted a 250% premium over the industry average earnings multiple for similar small businesses, but the decision makers’ offer was made at a 70% premium. This is still a relatively high premium and could indicate a bias towards making the acquisition work. The decision makers’ reasoning may have fell slightly into the decision trap of overconfidence in judgment due to the 70% price premium they offered for CEB. First, Robert and Dianne were perhaps overly optimistic that they could benefit from synergies created by the merger of FTI...
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This document was uploaded on 02/17/2014.

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