Tuesday, August 7, 2012
Becher, Juergens, and Vogel have a paper, Do Acquirer CEO Incentives Impact Mergers?, examining the effect of CEO stock ownership and stock options on CEO acquisition decisions. One observation, stock ownership matters. CEOs with large amounts of stock are less likely to pursue value reducing acquisitions. Stock options, on the other hand, aren't as good at incentivizing value enhancing acquisitions. More and more the evidence continues to pile up across a number of governance areas - stock options aren't all they were hoped to be incentive-wise.
Abstract: This paper examines the mechanisms by which CEOs are incentivized and their impact on merger decisions. We argue that CEO ownership and incentive-based (option) holdings are not interchangeable and have differing effects on the choice to undertake a merger, the structure of mergers conditional on a firm undertaking a merger, and ultimately the performance of a deal. Results suggest that CEO ownership aligns incentives, enabling CEOs to make decisions around mergers that maximize shareholder value. CEOs with higher levels of ownership are less likely to take on mergers or hire advisors, more likely to use cash financing, pay lower premiums, and have better post-merger performance. CEO incentive-based holdings on the other hand are associated with higher incidence of undertaking a merger or hiring an advisor, lower probability of using cash financing, and pay higher premiums. In some tests, increased incentive-based wealth leads to lower post-merger performance. These results suggest that CEOs with high option holdings may be motivated more by agency conflicts than acting in shareholder interests.
Monday, August 6, 2012
Schulte Roth has just released the 2012 mid-year update to its PE Buyer/Public Target M&A deal study. Key observations (based on a very small sample size) include:
- Fewer deals were completed in the first half of 2012, and average deal size decreased.
- Deals took longer to get signed up.
- The use of the two-step tender offer/back-end merger structure continues to grow.
- Despite the protracted pre-signing process, fewer targets engaged in pre-signing market checks, which likely resulted in the inclusion of more "go-shop" provisions.
- The limited specific performance remedy against the buyer remains the rule.
- The average size of the target break-up fees and buyer reverse termination fees were consistent with the 2011 deals, excluding the unusually low fees in one transaction.
- CEOs of the target companies participated in more buy-out groups than in 2011.
The whole study is available here.