A new book released this month offers guidance on how firms can avoid the kind of corporate victories that end up as disasters, harming shareholders and placing the firms future in jeopardy. Beware the Winners Curse: Victories That Can Sink You and Your Company (Oxford University Press, 2004) expands the model of the Winners Curse to explain how companies like Tyco, MCI-WorldCom and Lucent overpaid for acquisitions, and how shareholders suffered as a result.
The Winners Curse was first coined by economists to explain how in auctions, the winning bidder is usually the most optimistic about the value of an item being auctioned and therefore often bids more sometimes much more than the item is worth. In this new book, authors G. Anandalingam and Henry C. Lucas, Jr., explain how such activity in the corporate world whether its overpaying for another company, overbidding for new technology, or hiring the wrong superstar CEO can lead to disaster.
In order to help companies avoid the Winners Curse, the authors explain the cultural, personality, and psychological factors, as well as the market-based mechanisms, which contribute to the curse. Their advice ranges from curbing the imperial CEO, to adopting a systems approach for decision making and using game theory. The authors also examine several case studies to convince readers that the Winners Curse is a serious threat to business and managers, that winning is not everything, and that the curse can appear anywhere.
Case studies in the book include:
- The $4.5 billion paid by Lucent for a start-up called Chromatis in order to pre-empt other companies only to have to close it down within two years.
- The $44 million write-off taken by United Artists after managers decided to fund the box office disaster Heavens Gate based on the Oscar won by the director for his previous film The Deer Hunter.
- Coach Steve Spurrier being pursued by Dan Snyder, the owner of the Washington Redskins and given a salary of $25 million based on his enviable record in the college ranks, only to have him resign after two embarrassing seasons.
Beware the Winners Curse is a brutally honest review of how often investors lose money when management pursues winning at almost any cost, said Harvey Seegers, former CEO, Global Exchange Services. The authors present abundant examples of corporate hubris that should send shivers down the spine of any director serious about protecting shareowner interests.
More than a caution against a reckless pursuit of every opportunity, this book provides a model and a framework to systematically evaluate each situation on its own merit, said William E. Steele, Chairman and CEO, Kencast. Every executive who wants to deploy his resources effectively should read this book.
About the Authors
G. Anandalingam is the Ralph J. Tyser Professor of Management Science at the University of Maryland's Robert H. Smith School of Business, and Chair of its Decision and Information Technologies Department. He received his B.A. from Cambridge University and his Ph.D. from Harvard University. Henry C. Lucas, Jr., is the Robert H. Smith Professor of Information Systems and at the University of Maryland's Robert H. Smith School of Business. He received his B.S. from Yale University and his M.S. and Ph.D. from the Sloan School of Management at M.I.T.