The Predictioneer’s Game: Using the Logic of Brazen Self-Interest to See and Shape the Future

pretty much the same across all mergers and acquisitions. The price to be paid (or to be obtained) is always a question, of course, but merger discussions rarely get anywhere if there is a substantial disagreement about the worth of a property. That means that the price rarely is the reason an attempted merger or acquisition fails. Remember the example of a merger between a French and a German bank in an earlier chapter. That deal hinged on whether the German executives had to move; they were willing to take a lower price for their bank if they could stay put in Heidelberg.

Several years ago I worked with an international team of analysts on a major effort to create a unified defense industry across Europe, one that could compete with the American defense industry. We looked at virtually every possible combination of defense firms in Britain, France, and Germany, as well as several possible combinations that would have included defense firms in Italy, Spain, or Sweden. The question put to us was “Can we do these mergers?” To answer that question, my team needed to examine approximately seven different issues for each possible combination of firms for a total of more than seventy individual issues, each representing a decision that could make or break a multibillion-dollar deal. Some of the make-or-break questions, the issues on which agreement had to be reached, included (1) the price, (2) allocation of management control between merged units, (3) the scope of businesses to be included or excluded from the merged entity, (4) employment guarantees for workers in various units across national boundaries, (5) government’s role in regulating or sharing in ownership and management of the newly created firm, (6) the timing of the transition to combined working units and teams with shared technology, and (7) where the senior managers would be expected to live.

Merger efforts are more likely to fail because of the “lesser” issues than because of a price disagreement. Yet few executives seem to recognize this when they initiate the process. As a result, they spend millions of dollars on getting good financial advice to sort out the right price to offer, only to have many prospective deals fall through because too little effort has been invested in working out other issues. Sometimes these “other issues” can seem so absurdly small that they are ignored, only to end up being, in hindsight, the deal breakers.

A few years ago I worked on a failed merger in the pharmaceutical industry. The prospective deal was expected to produce great efficiency gains that could have dramatically benefited the pharmaceutical market and prescription drug consumers. Almost all of the executives in the two firms involved were most enthusiastic about the opportunity, with “almost all” being the key phrase. The killer issue that did the deal in involved allocating management control between the CEOs in the two firms. That, of course, is no small question. The absurdity came in how the deal was killed.

The two chief executives hated each other, and, as is the case with many big companies in Europe, there were bitter family issues lurking in the background as well. So deep was the animosity between the two CEOs that everyone agreed a way had to be found for them to work together before going forward. A dinner was arranged for the two of them, and senior aides, who should have smelled a rat, also attended. It took a huge effort just to get this pair to sit at the same table.

The host CEO finally agreed to have the dinner at his home and then, without my or any of his own aides’ realizing it, he planned a menu of course after course of the other chief executive’s most disliked foods. Amazing as it may seem, this prospective multibillion-dollar deal fell apart over a menu, or, more accurately, over a deeply personal conflict that made all other efforts and points moot.

Working out what the right issues are takes patience, good listening skills, and the ability to steer a conversation toward what will really drive results rather than the inchoate musings of the decision makers. Fortunately, the dinner menu rarely plays such a prominent part in negotiations. For me, an “issue” is any specific question for which different individuals, organized groups, or informal interested parties have different preferences regarding the outcome, and for which it is true that an overall agreement cannot be reached unless at least a key set of players come to agreement on the question. It helps to know whether there is a status quo, and if there is, to make sure that the issue is not constructed to be biased against the existing situation.

Recently I taught a seminar in which my students were asked to pick a world crisis that interested them and to model a way to solve the problem. One group of students decided to examine carbon dioxide emissions (a topic I return to in the last chapter). They defined an issue in which one end of the scale reflected current CO₂ emissions and the other end the stiffest reduction advocated by any environmental group. Everything in between represented possible agreements among the players. Do you see the problem here? I asked if they thought there were no energy companies or others who felt that CO₂ emissions should be less regulated than was the case at the time. Of course there were interested parties who wanted to have more freedom to produce CO₂! So the way the students had designed their issue was biased. The only answer that could come out of their exercise was to increase regulatory controls or, with low odds, keep them the same. Their scale allowed no possibility of anyone wanting to produce more carbon dioxide. They had unwittingly created a biased issue, one that made them feel good but would almost certainly lead to a wrong answer. Such fundamental flaws in the design of questions ensure that the answers to them will be useless.

YOU CAN’T ALWAYS GET WHAT YOU WANT, BUT IF YOU TRY …

Once an issue is properly framed, we have to think about how to capture the thought process that people go through in working out decisions. Without doing that, without climbing into the heads of your rivals, you’re not likely to get what you want. You’re not even likely to know how to try to get what you need.

The game structure I use looks at choices as sometimes involving cooperation, sometimes competition, and sometimes coercion. The most complicated part is to try to emulate how people think about changes in their situation as well as what others say and do. Players are always interested in altering the lay of the land in their favor. They want to surround their desired outcome with tall mountains of power that are hard to overcome. They want to tear down mountains of opposition, leveling the power terrain around positions they want to defeat. At every step along the way, everybody has to work out who will help them and who will get in the way. They have to calculate the risks and rewards, costs and benefits of actively trying to change other people’s choices or lying low, trying to stay out of the line of fire. The math can get complicated,¹ but let’s look at some examples of the process at work that we should be able to follow pretty easily.

The table below shows the small data set that resulted from the cookie-and-coffee conversation I had with Shmuel Eisenstadt in 1987, augmented in 1989 by a discussion with Harold Saunders, who by then was the former deputy assistant secretary of state for the Near East and North Africa. The continuum of possible outcomes on the settlement issue ranged from the establishment of a fully independent, secular Palestinian state at one extreme to the annexation by Israel of the West Bank and Gaza at the other extreme. Position 30 on the scale was defined to represent territorial concessions granted by Israel to the Palestinians without establishing an autonomous state but establishing instead a Palestinian political entity federated with Jordan. The 1987 status quo was located at the position equivalent to 85 on this scale (under the “Negotiated Settlement Options” column). There was no semi- autonomous Palestinian territory or government at that time.

It is not hard to see how territorial concessions can be organized on a continuum. Although the scale above is not based on percentages of land or land value, still there is a natural progression in choices ranging from Israel’s annexing contested territory on to no concessions by the Israelis and finishing at the other end of the scale with a fully independent Palestinian state. From these beginnings in 1987, I prepared a forecast that would closely predict the actual territorial concessions agreed to between the Israelis and the Palestinians in 1993 at Oslo. (We will look more closely at this forecast a little later in this chapter.) Let me reemphasize a central assumption behind the