Sandbagging
A top management strategy to temper the expectations of the company's investors
What Is Sandbagging?
Sandbagging is often seen when a company's top management strategically tempers the expectations of its company's investors by forecasting results that are well below what they know will be realistically achievable.
In other words, management personnel intentionally lower the projected earnings and other performance indicators to produce greater-than-anticipated results and impress its shareholders.
In a corporate setting, sandbagging most frequently occurs when a company's top executives cunningly lower shareholders' expectations by providing guidance that is well below what they know will be really possible. In other words, management staff understate expected profits and other performance metrics.
Therefore, when the company achieves better-than-expected results, investors are significantly more impressed than they would have been if it had merely met the low projected expectations.
The sandbag technique has become ordinary in the world of forwarding guidance regarding the declaration of expected revenues and earnings.
As a result, investors' response is often more muted than it once was because they are becoming wiser to this practice and are thus less knee-jerk reactionary to these announcements. Analyst valuations can consider this method of sandbagging if it has occurred often.
Why People Sandbag
If a person pretends not to know how to play soccer so your opponent will bet money on a game, you are a sandbagger. A sandbagger is someone who deliberately misleads you to get what they want.
Sandbaggers deceive others about their real intentions or abilities or use deception to gain something.
Individuals sandbag for many reasons, for example:
- Less confidence in their skills to take on a specific role.
- Some deliberately underperform to hide the true extent of their capabilities, and
- To gain personal advantage/benefit from this strategy and many more.
In a company where the output level determines an individual’s performance/bonus, an employee may lower the expectations to show exemplary performance to achieve the reward in the form of a promotion or a bonus.
The employee may be afraid of a past success followed by a declining performance that may result in termination of employment. In case of a purchase and sale agreement, the buyer can sandbag the seller for monetary gain.
Sandbagging strategy applicability
As we have just read why people sandbag let us now try to understand how they apply it in real-life scenarios.
The sandbag strategy can be applied to various fields a person can come across in their life, i.e., personal and professional life. In the case of professional life, let us find how an individual or a company can apply the sandbag strategy and why they use it.
Sandbagging in Investing
The word “sandbag” is a strategy of lowering the expectations of a company or an individual’s strengths and core competencies to take advantage of the other end without them knowing about it.
Sandbagging is often seen when a company's top brass issues projected reports that are intentionally well below what they can realistically achieve.
It is also used in sports and recreational activities, like when in a game of poker, a player deliberately bluffs a game to entice the winning probability.
It is considered to be a devious form of running a business. When a business uses sandbagging extensively, it backfires and reduces the impact on investors, analysts, and the company's share price.
Sandbagging in Business
The sandbag technique is a widespread phenomenon in any business. The businesses never show their abilities to ensure that the shareholders' expectations align with what the former can quickly achieve.
This process works the best in keeping the companies safe, and there comes a time when the same stakeholders start expecting results beyond what they expected previously.
As a result, there will be a time when their expectations are higher than what the companies can achieve.
Thus, applying this strategy to a limit is recommended and ensuring that the shareholders' expectations remain achievable at different times.
Sandbagging in the Sales Department
The sales executives handle immense pressure because they are expected to achieve their set targets to increase their performance based on incentives.
Therefore, in the sales department, employees tend to participate in a rat race and compete against colleagues to ensure they achieve their targets and become eligible for incentives.
For them, this technique is the best tool to keep the management's expectations within limits. With the help of this technique, the professionals pretend to be less capable of achieving the set targets by reducing managers' expectations.
As a result, they appear to be overperformers given the set expectations and receive rewards and incentives for their efforts. As a result, their efforts are recognised when the sales executives' performance exceeds expectations.
Sandbagging in Mergers & Acquisitions
A purchase agreement is prepared to contain a pro-sandbagging term in a merger and acquisition deal between the acquired company(seller) and the acquiring company (buyer).
In such a deal, the acquired company should disclose all accurate information related to the merger or acquisition.However, the acquired company sometimes overlook disclosing important information to the acquiring company or intentionally hides it.
This sandbagging M&A clause protects the purchaser's interest or the acquiring company by providing the right to recover the losses incurred due to the missing information.
Sandbagging in a Startup
To make a startup business successful, the founders of the startup produce better-than-expected results for its investors who have shown faith in them by funding their venture(i.e. the startup).
When these investors trust a new venture, it is evident that them to expect a decent performance in return. The startup's performance in the initial years helps investors decide on the venture's further funding.
Startups induct the sandbag strategy in their setup to gain the investors' trust and keep them happy. They give the earnings updates and estimates below what they hope to achieve in the future.
Hence, when the achievement is better, the Founders and the company look like they overperformed and exceeded shareholders' expectations. Once the startups prove their consistency and goodwill in the market, more investors are willing to invest in their shares.
Does Sandbagging Work?
The sandbag technique isn't merely restricted to financial reports announced by publicly traded companies. It also has a presence in recreational activities where betting is frequently involved.
For example, in the game of poker, you must be well aware that poker generally rewards the players who ace at bluffing and deceiving their opponents. After all, as per the famous saying, a game of poker is more of a game of people rather than just cards.
One such deception technique that can pretty much tilt the stakes at any game of poker in your favor is sandbagging technique. Does the name itself sound interesting enough already?
The sandbag technique can be performed in any circumstance wherein the individual purposely makes them appear less skillful than they otherwise are to gain an advantage in the future. It is not illegal but a dishonest way to conduct oneself.
Sandbagging FAQs
Bluffing is usually used in games and recreational activities, whereas sandbagging is applied in finance.
The only similarity between the two is that in both cases, the person tries to deceive others' expectations about them and later surprise them with results they didn't expect.
In a few cases, this technique backfired because investors called the bluff of those doing it and, consequently, anticipated the outperformance that the sandbaggers were attempting.
Because of it, a stock price may sometimes fall because the company's earnings failed to exceed the expectations amounts investors had expected.
No, this strategy is not illegal as it is used to a certain extent to help build confidence in the eyes of its investors (i.e. angel investors, shareholders)
However, it would lead to the loss of the earned goodwill when used for an extended period. There are times when the expectations will be more and capabilities will reduce due to a lack of skills, talent, or dedication.
As the companies showcase to be less productive than they are, they prepare their reports accordingly.
When the annual reports of any company mark an above-average growth, the investors(i.e. angel investors, shareholders) are happy to see results exceeding their expectations.
This leads to a surge in the share price due to the increase in investment in the company.
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