Persuasive Communication - How Audiences Decide. 2nd Edition

Types of Audience Decisions 75

The specifi c criteria used to make investment decisions depends on both the investment

and the audience. Investment advisors typically recommend investments to their clients based

on a number of quantifi able criteria: the investment’s amount of risk, fi xed return rate, time

horizon, management fees, liquidity, and cost of redemption.^70 Wall Street analysts, on the

other hand, not only use quantifi able criteria to make their recommendations, they also use

a number of qualitative criteria such as their personal evaluations of the fi rm’s CEO and top

management, the cogency of the fi rm’s stated goals and strategy, the fi rm’s ability to fi nd and

exploit market niches, and its ability to produce a quality product.^71 As it turns out, such

qualitative criteria explain twice as much variance in fi rm performance as explained by more

quantitative factors.^72

When CFOs make the investment decision to acquire another fi rm, their decision criteria

include the strategic fi t of the candidate with the acquirer, the competitive environment of the

candidate, the management expertise of the candidate, the fi nancial condition of the candidate

and terms of the deal, the operational capabilities of the candidate, and the synergies between the

candidate and the acquirer.^73 Similarly, when buy-side analysts evaluate a fi rm’s acquisitions, their

decision criteria include the price of the acquisition, the acquisition’s fi nancial impact on the

acquirer, the likely synergies, the new management, the acquisition’s fi t with the acquiring fi rm’s

strategy, and the acquiring fi rm’s implementation plan.^74

Studies of venture capitalists (VCs) screening business plans fi nd that VCs’ decision criteria

for investing in a new business include the start-up’s projected revenues and profi ts, its market, its

product, its management, and the terms of the deal.^75 Likewise, angel investors’ decision criteria

for investing in a new business include its projected sales and revenues, evidence of marketplace

acceptance, market size, patent protection, the valuation of the venture, as well as the management’s

personal and professional characteristics.^76

The decisions investors and managers make to divest themselves of their current assets refl ect

another type of investment decision. When managers of multinationals consider divesting one of

their foreign operations, their decision criteria include not only the performance of the operation

but also the market’s growth, the political stability of the host country and the exchange rate volatil-

ity of the host country’s currency.^77

The following list of questions generalizes many of the investor-specifi c decision criteria

identifi ed previously and provides a starting point for predicting an investor’s decision criteria

for any particular investment decision. The list can also serve as an outline for the documents

and presentations professionals produce in order to elicit investment decisions from potential

investors.

• What is the nature of the investment?


• What is the price and terms of the deal?


• What is the current and future value of the investment?


• What are the risks and liabilities associated with the investment?


• What are the qualifications of the management?


• What is the management’s strategy and implementation plan?

In addition to answers to the previous questions, investors may also require benchmark informa-

tion about the value of “comps” (i.e., comparable publicly-traded fi rms), alternative investment

opportunities, the investment’s historical fi nancial performance, as well as industry averages for

similar investments.^78 Investment advisors often use U.S. treasury bills as benchmarks when

discussing risk with their clients. Treasuries serve as the closest real-world analog to risk-free

returns.^79