More on the need for Scenario Planning
I’ve received a lot of e-mail traffic on the topic of scenario planning and the M&A process — and some postings on this blog — with much of the discussion focussed on the agreement that use of this technique (originally from the military) would yield better results for M&A practitioners. Please see the earlier posting on this topic (M&A Frenzy and the Need for Scenario Planning). There are also some excellent websites (shown in the Blogroll at the bottom of this page) which cover this topic well in other fields.
This need not be done in the traditional sense of ‘scenario planning’ which is relatively formulaic. Think perhaps about the following:
Because humans find it difficult to calculate probability rationally, a company’s intelligence function can use the power of the bookmaker. Daymon Runyan, paraphrasing Ecclesiastes, said that ‘The race might not be to the swift, nor the battle to the strong but that’s where the smart money goes.’ By using trading (e.g., http://www.intrade.com) and/or spread-betting (e.g., http://www.cantorindex.com) sites, a company can see how the world really views the likelihood of specific events and, significantly, how their own company is viewed by the market.
In 2003, an insensitive but smart analyst at DARPA (the Pentagon’s Defense Advance Research Projects Agency) proposed setting up a speculative futures market on terrorist attacks. Notwithstanding the obvious temptation for real terrorists, the idea was sound. Getting people to bet real money on future events focuses the thinking of those people and saves the inordinate costs of expensive computer models. There really is wisdom in crowds.
Companies could actually create their own internal speculative markets to leverage the knowledge contained within the organization. By allowing employees to bet on specific questions (using company money for real returns), an efficient market for ideas can be created. More real, more relevant, and more fun than a ‘suggestions box.’ Apparently, the pharmaceutical company, Eli Lilly, has used this approach to predict the success of drug research with remarkable accuracy, and there is no reason to doubt its applicability to the M&A market as well.
Just think how this might have helped Multiplex – the Australian developers of England’s Wembley Stadium, which was delivered late and with large penalties (over A$200 million). The result of their problems was the announcement today that they would be purchased by a Canadian infrastructure specialist. Or another example: Did Barclay’s (or, for that matter, ABN AMRO) do adequate scenario planning in the lead-up to their proposed merger? Certainly, one very likely scenario would be the entrance of another bidder, in this case, a formidable one (Royal Bank of Scotland who joined forces with Santander Bank and Fortis – this forming a British / Spanish / Belgium consortium). And if that wasn’t enough for Barclays, they now have Atticus Capital challenging them on the deal, saying that they do not want Barclays to enter into a bidding war. Hedge funds and their like are becoming more activist – just look how they brought down both the CEO and Chairman of the Deutsche Börse when they targeted the London Stock Exchange in 2005. All very predictable, and not even with 20/20 hindsight but rather with scenario planning.
Intelligent Mergers 
There’s a huge amount of “stuff” on prediction markets. My former colleague, Art Hutchinson, blogs frequently about such matters at
http://cartegic.typepad.com/
Best
Bob
Bob Weber
Monday, 11 June 2007
Scenarios + prediction markets = dynamic, ‘smart’ scenarios.
It’s a vision I’ve been pursuing (as have some clients) since hearing about PM’s in the mid 90’s–a year after I started doing scenarios with large organizations.
Interactive, modular scenarios in particular (the kind we practice) have been a useful tool in several M&A situations I’m personally familiar with… which is not to say that every corporate marriage is that deliberative.
Often they’re done by one company, leading to the realization that they must attain scale or add some capability in order to survive. I’ve also seen them done after-the-fact: to bring two teams together around a new, common vision for the future. Rarely have I seen them done by two entities together prior to “getting engaged”. That’s too bad. With the bankers barred at the door, some might discover via scenarios that they should give back the ring and go home.
Art Hutchinson
Tuesday, 12 June 2007