Who really gains from M&As?

2010

Whatever their motivation, the fact remains that mergers and acquisitions are a risky business. Be it a desire to gain access to new technology, increase market share or achieve economies of scale, M&As rarely live up to the expectations trumpeted by the acquiring company's management

Just how unsuccessful is illustrated by a 2007 study of more than 200 major European M&As by consultancy, Hay Group. This found that senior business leaders believe that fewer than one in 10 M&As were "completely successful" in achieving their stated objectives.

Another study by Accenture found that fewer than half of M&As achieved either their hoped-for cost-savings or delivered their expected revenue or value.

And to make matters worse, M&As also destroy leadership continuity in target companies' top management teams - and with it, their performance - for at least a decade following a deal because so many senior executives quit.

All of which begs the question why organisations continue to pursue such deals when they are so unlikely to deliver value for shareholders of the acquiring firm. Surely someone must be benefit?

A rather startling answer to this question has emerged in a study by academics from the Lubar School of Business at the University of Wisconsin. They have found that a major factor in how much the shareholders in acquiring firms lose as a result of these deals can be gauged by the degree of "overlapping" institutional ownership - in other words, how far institutional shareholders have simultaneous stakes in both the acquiring and the target company in an M&A deal.

Ravi Dharwadkar, Pamela Brandes and Maria Goranova found that in deals where there was no overlapping institutional ownership, the acquiring firm's value fell by an average of just $1.6 million. In contrast, in deals where there were overlapping ownership stakes, the acquiring firm value fell by $111.7 million.

Looking more closely at this staggering disparity revealed that deals where there was less overlap (the bottom 25 per cent of deals) were associated with a loss of $80.7 million for the acquiring firm. In stark contrast, deals with significant overlap (the top 25 per cent of overlapping deals) were associated with an average loss of $379.8 million for acquirers.

The researchers found that these results held true for two measures of overlap: both the number of overlapping owners involved in the deals as well as the percentage of ownership overlap.

The trio also examined whether the negative effect of overlapping ownership is constrained by better corporate governance as measured by level of board independence, CEO duality (when the CEO also serves as chairman of the board), managerial ownership, and CEO stock options.

While the spread of overlapping ownership is associated with suboptimal M&A deals, effective oversight by boards constrains the negative effect of overlapping ownership. Specifically, boards with more independent directors and those having chairmen separate from the CEO role can counteract the effect of overlapping owners.

The authors conclude that managers pursue suboptimal deals because overlapping and non-overlapping owners have different interests in such deals - and the overlapping owners who may lose on the acquirer's side may make up for this loss on the target's side of the deal.

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