M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Saturday, October 16, 2010

Are CEOs Losers in M&A?

The WSJ highlights the potential costs of CEOs of a sale of their company:

Only 14.5% of chief executives would do better selling their companies at a 25% premium than they would under their current pay packages, according to an analysis of compensation packages for CEOs of companies in the Standard & Poor's 1500 index by compensation consultancy Shareholder Value Advisors.

In many cases, the loss of expected future pay and the time value of options would more than wipe out gains on equity and on the spread between the option exercise price and the take-out price.

The analysis showed that most CEOs—729, or 78.9% of the sample—would be significantly worse off (or more than a 5% loss) if their companies were acquired at a 25% premium, though shareholders likely would be better off. Of those CEOs, 428, or 46% of the full sample, would see their wealth fall by 50% or more in a sale that brought shareholders a 25% premium.

Another 61 (6.6%) CEOs would come out roughly even (within +/- 5%) with a sale at a 25% premium.

It's hard to say how these kind of incentives affect decisions by CEOs when there's an offer on the table, but it might be worth thinking about whether these wealth effects result in entrenchment. 

-bjmq

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