How to deploy a red team and avoid deal-related confirmation bias

Have you ever worried that a deal seems to have a life of its own, and you’re getting sucked into its vortex? Even though there’s a nagging doubt in the back of your mind, everyone has put in so much effort and they’re all so committed it’s going to happen regardless?

Have you ever wondered what your rivals might be thinking – how will they approach the opportunity? What is the minimum you will need to pay to beat them, or can they afford to pay more?

At O&O, we get asked these questions all the time. Even some of the world’s leading investors – both corporate and institutional, with robust processes and bulletproof track records – seek out a second opinion. This willingness to take a step back and actively consider another perspective might actually be one of the reasons they are successful. So how do we do it?

Our newsletter articles tend to offer insight into the changing media landscape and how we help our clients respond to it. I want to add a series of short articles taking a closer look at how we actually approach our work – what we do to help our clients, and how we are different. I thought the ‘Red Team’ products, from our Investment Advisory practice would be a good place to start.

What makes O&O different?

All our staff work on media, entertainment and sport issues all the time, across our four practice areas: Investment, Policy, Strategy, and Commercial. So, we’re used to considering issues from multiple angles, and our breadth of experience means that we understand how each part of the value chain fits together – and how the economics of one area may influence the behaviour of players elsewhere.

What is a Red Team exercise, and why should you consider one?

Our Investment practice has seen a growing interest in our Red Team support service. Red Team exercises, of course, are nothing new – often used by Private Equity or Corporate M&A teams to challenge an investment thesis. The Blue Team will set out the case for an investment, while the Red Team will provide the contrarian view, ‘kicking the tyres’ on each assumption and stress-testing the business case with downside scenarios.

This is an important part of the investment process. By bringing some fresh thinking to a given investment proposal, you can remove the risk that the team is ‘too close’ to the investment, and surface new ideas about the challenges and opportunities facing a business. We think it is an important part of any investment decision whether by Private Equity or corporates.

If you don’t have an in-house ‘Red Team’, we can help. In fact, even if you do have an in-house Red Team, we can help bring a truly independent and expert view.

What type of challenge will an O&O Red Team provide?

Depending on the circumstances, different approaches may be needed – we have three options. In each case we bring new ways of viewing the market, its opportunities and risks. The three approaches are:

• An independent view: our expert view of the landscape, prospects and synergies – this is based on our extensive knowledge of the sector and can be compared with your own thinking – to validate your assumptions and hypotheses, or give you cause to rethink

• A contrarian view: a critical review of an investment proposal, actively stress-testing your view, challenging assumptions, and presenting a believable ‘downside’ case. This approach provides more active challenge to the investment thesis and we typically indicate the extent to which we believe the contrarian view

• A competitor’s view: providing an understanding of how a competitor or rival bidder might view the market, to inform your bidding strategy, i.e. by knowing the value to a potential rival or rivals. This understanding is crucial if you want to avoid bidding your full value and only pay as much as you need to

We think an external perspective is crucial for any investment decision, but even more so in a rapidly changing sector and, given the current economic climate, where money is expensive and M&A – for corporates at least – could be the difference between success and failure.

We work across the full length of the AV and audio value chains, for both traditional and new media – we understand the opportunities provided by new technology, and the synergies available to acquirers. If you would like to discuss how we can help support your investment decisions, from their genesis through to performance enhancement, please get in touch.

Reach out to Matt Cain at matt.cain@oando.co.uk if you would like to know more.