Deal Execution in M&A: A Lesson from the Panama Canal

There’s a (true) story about the building of the Panama Canal with a great lesson about deal execution.

In the mid-1800’s, fresh off his wildly successful completion of the Suez Canal, Ferdinand de Lesseps was considered the perfect choice to lead a new and massive endeavor: the construction of a canal across the Isthmus of Panama, linking the Pacific and Atlantic sides of the continent. It was a tremendous idea – on completion, the canal would save ships between one and two months of travel time. After Lesseps’ Suez success, there was unbounded faith in his abilities to execute, and investors responded enthusiastically. In France, fundraising efforts were three times oversubscribed.

With the triumph of his Suez sea-level canal, Lesseps was determined to build a sea-level canal in Panama – that is, a waterway that would see ships passing through on a single level, with no lock and dam system for lifting and lowering. Unfortunately, his sea-level plan didn’t factor in the volcanic rock comprising Panama’s continental divide, that would prove impossible to blast through. Nor did Lesseps’ plan factor in other unique attributes like yellow fever and malaria, that were to kill 22,000 of the canal workers.

In Lesseps’ determination to replicate his past success, he refused to listen to engineers that knew Panama’s terrain and suggested that, for this country, only a lock and dam system that would lift ships over the continental divide would succeed. Ultimately, Lesseps’ failure to account for the unique Panamanian terrain is where his execution went awry.

Image courtesy of the Panama Canal Authority

To make a long story short, Lesseps failed miserably. Had he listened to those who understood the unique attributes of Panama’s terrain, he might have succeeded (as the Americans did, subsequently, with a lock and dam canal). Instead, he anchored his approach to his past success, and that’s where we find the lesson.

The example of Lesseps is, of course, extreme. But his anchor-driven decision making is something that we all do. Anchors are biases that impact all sorts of decisions – from draft choices for sports teams to management due diligence in an M&A transaction, to deal execution. Through our personal experiences, we develop subconscious notions (typically based on very small samples) of what is a “good” basketball or baseball player or manager or execution strategy, and those become our anchors, which are very much part of “gut-feel”.

Dr. Richard Davis, a management psychologist and CEO of Kilberry, a Toronto-based leadership advisory firm explains further:

“There is substantial evidence that we have a really poor ability to understand ourselves and our own biases,” Dr. Davis says. “We have anchored in our mind what ‘good’ looks like, and we evaluate people and develop strategies based on that anchor. But anchors can lead us to poor decision making. For example, when a buyer is assessing a management team, there shouldn’t be a fixed idea of ‘good’, as different growth strategies will require different attributes.”

So, circling back to our opener…what is the Lesseps/Panama Canal takeaway for deal execution?

Dr. Brett Richards, President of Connective Intelligence, who offers expertise in executive development, team dynamics, innovation and strategic thinking. puts it this way:

“It’s critical to look at the current reality of a business and identify tangible metrics to validate gut feel. Every business organization is unique, so it’s important to start with an accurate assessment of what the unique aspects of this particular business are in order to support success in deal execution.”

Sellers will have different objectives, their businesses will have a range of issues to address, sectors will drive variations in valuation, and different personalities will require tailored approaches. There are certainly lessons to bring to the table from past successes (and failures), but as the story of Lesseps and the Panama Canal cries out: every new deal deserves a new, anchor-free lens.

Further Reading

For more on the impact of anchoring and other human biases in M&A transactions, check out the MergerMarket report: M&A Valuation: Trends, Challenges and Horror Stories.

Karen Fisman

Karen Fisman is a freelance writer, covering finance and deal-making with a focus on Canada. Her current assignments are with FirePower Capital, an independent Canadian investment bank and private capital firm, and with a finance-focused content marketing firm.  She was previously the publications lead at a Toronto-based M&A advisory firm, and has years of experience as an equities analyst covering the media and entertainment sector. Karen has an LLB from the University of Toronto and an MBA from the Rotman School of Business.