AI vs. Human: The Race in the M&A Decision-Making Process

Abstract

The paper proposes an AI approach to explore the universe of M&A opportunities and automate the M&A decision-making process. Tracing previous M&As and mining high-dimensional financial data, the AI model can accurately identify potential acquirers and targets in advance and project market reaction and synergy of M&As.

By comparing the outcomes of actual M&A deals with the expected outcomes of hypothetical, AI-projected counterfactuals, we invent two metrics to measure the quality of M&A decisions. M&A opportunity cost measures the forgone market value due to choosing the actual target rather than the theoretically optimal target. Relative decision score (RDS) measures the relative ranking of an actual deal against all other M&A options for a given acquirer. These decision quality matrices correlate with the long-term performance of the acquiring firm.

Applying these two measures, we find that 1) acquirers miss the most value-enhancing target resulting from home bias and the pursuit of diversification, 2) younger, entrenched, and overconfident CEOs and CEOs with little operational experience are more likely to conduct suboptimal M&A deals. By comparing various characteristics of AI-identified excellent and bad targets, we highlight the types of M&A targets an acquirer should choose.

Presenter

Iftekhar Hasan holds the title of University Professor at Fordham University and serves as the E. Gerald Corrigan Chair in Finance. He is a scientific advisor at the Central Bank of Finland, an honorary faculty member at the University of Sydney, and a research fellow at the Financial Institution Center at the Wharton School and the IWH Institute in Halle, Germany. He is the managing editor of the Journal of Financial Stability.

He has been involved with numerous academic research grants from governmental, national, and international science foundations and organizations in the U.S. and abroad. Hasan has several publications in print (books, book chapters, edited volumes, and peer-reviewed articles) in influential academic journals with over 32,000 Google Scholar citations (H-Index 87). He has also been a consultant or a visiting scholar for numerous international organizations (WB, IMF, UN, Federal Reserve, the OCC of the U.S. Treasury, Banque de France, Development Bank of Japan, and the Italian Deposit Insurance Corporation.

Dr. Hasan has served on the Advisory Boards of the University of Economics, Hanoi, Vietnam; UNS, Universitas Sebelas Maret, Solo, Indonesia; Business School of the Hong Kong Polytechnic University, Kowloon; and the Montpellier Business School, France.  A Fulbright scholar and a Fulbright selector, Professor Hasan is also a recipient of the “Changjiang (Yangtze River) Scholar,” in China; “Universitas Sebelas Maret Award,” in Indonesia; “Louis Bachelier Fellow,” in France; “Shimomura Fellow,” in Japan; “Bursa Malaysia Chair,” in Malaysia; “Distinguish Fellow,” of the Financial Engineering and Banking Society; and received an honorary doctorate “Doctor Honoris Causa” award from the Romanian American University in Bucharest.