Shopoholic Corporates

Why do you buy orange juice instead of growing the orange yourself then using a juicer to squeeze out the juice? In fact why do you buy the juicer instead of buying the parts and building it yourself? And while you’re at it, why don’t you just mine for some iron ore, convert it into steel, build the parts … you get the point.

I don’t know the answer but if I were to venture a guess I’d say because its “cheaper” to buy than build. Cheaper-in-quotes because one should take into the account the money you pay, the opportunity cost, the value of time spent, value of physical effort spent etc. All-in you most likely save a lot of money, time and headache by just buying the juice.

Seems like a good enough reason to buy. We automatically go through this calculus for most our buy vs build decisions. And it serves us well. Let’s call this good buying.

Do we also practice bad buying? Me personally? No 🙂 But here’s what it would look like IF I were to …

1. I would buy an iPhone 5 when I have the 4s and all I use my phone for is voice, email and maps.

2. I would drink a $100 bottle or wine when in a blind tasting I can’t tell the difference between a $10 and a $100 bottle.

3. I would buy a $400 air ticket on Continental instead of a $250 one on American because a) I’m enrolled in OnePass not AAdvantage and b) I can bill the travel to a client or my employer.

Now I’m no psychologist but going through Munger’s laundry list of human fallacies it seems to me that #1 happens because of social proof tendency, #2 because of influence from mere association tendency and #3 as a superresponse to a reward.

Does this good buy, bad buy model extend to corporate M&A as well? Is there a way to figure out if an acquisition was done for a good reason or not?

Well let’s first try to hypothesize the logical intent of a corporate purchase. What is a company really buying when it’s buying another company?

What do companies buy when they buy other companies?

Why do they buy companies?

Does good vs bad depend on the reasons to buy or the outcome post-purchase?

To be continued …