Do Managerial Agendas Drive M&A

Managers of firms have their personal interests, and these may be different from the other company. For managers and CEOs, this may be for the purpose of extending their stay in their position. They may also have a managerial agenda of continuing to receive what in the United States are bountiful compensations and perks. This compensation in the form of money is on top of the income they receive from being the “Big Cheese”.

In a study by Morck, Shleifer, and Vishny, 326 acquisitions over the period 1975–1987 were analyzed. The researchers found that bad deals were due to the aims of these managers doing the deals. Three types of acquisitions were found to cause lower and usually bad announcement period returns. These were diversifying M&As, acquiring a rapidly growing target, and acquiring a company when the managers have a poor performance track record before the deals. The results regarding diversification are also proof that this strategy is debatable. But their result about growing targets may reflect the fact that it is hard to “buy growth,” and when you do, you might have no choice but to overpay.

Their results with regards to bad managerial track records are also intuitive. Managerial performance may worsen if you are bad at running a business. And then you add to it and increase the managerial demands. Managers may be good at managing a specific type of focused business. Allowing them to perform in fields that they aren’t knowledgeable of may cause a tragedy. On the other hand, senior management at companies that have always been diverse since the start. Like GE is in the business of managing very diverse industries. These abilities in management are their skill set.

Vivendi and Messier’s Hubris

One relevant example in this topic is Vivendi and Messier’s Hubris. There was a case study about a stodgy French water utility before it was named Vivendi Universal. The CEO of the French water utility aimed to be a high-flying leader of an international media company. But he sacrificed shareholders’ interests to do so. The shareholders picked up the tab and he walked away with too much of their money when they failed. The combination of water and entertainment assets were so poor that they lost 23 billion euros in 2002, and 13.6 billion in 2001.

According to reports, Messier, the CEO was not satisfied with his position. He didn’t want to be the CEO of a water utility company. Instead, he engaged in major acquisitions of entertainment companies so he can become an entertainment CEO.

In the year 2000, Messier bought Seagram Universal. This resulted in him giving the major shareholders 8.9% of the Vivendi company or 88.9 million in shares.

This signaled Vivendi’s invasion in the media industry by acquiring a company which was a combo of liquor and soft drinks. Messier bought Seagram Universal as this company was formed by the acquisition engineered by young Edgar Bronfman when he took an authority position at Seagram. To finance its ventures into the entertainment industry, Edgar Bronfman used the assets and cash flow of the Seagram family business. This arrangement experienced its own rough period as the film business ended up being not as energizing to Seagram’s investors as it was to the youthful Mr. Bronfman.

Vivendi Universal Entertainment

Messier also bought Canal Plus and Barry Diller’s USA Networks which failed. This arrangement united the Universal Studios Group with the diversion resources of the USA Networks to shape what they called Vivendi Universal Entertainment. He paid 12.5 billion euros for Canal Plus despite the limitations, debts, and the company not being profitable. He even purchased a portion of Cegestal, a French telephone organization. Likewise, the organization bought Houghton Mifflin, a book distributor, for $2.2 billion, which included $500 million underwater. Vivendi also owned an equipment division that held U.S. Filter Corporation.

Messier moved to New York in 2001 and was filled with hubris. He concedes that this is a normal trait of a CEO. He said that a strong ego is more becoming, although each has his own wearing. Vivendi began to rack up the losses and shareholders and creditors called for an end of the acquisition binge and the ouster of its CEO. The company started the slow process of disassembling the media. And utility that Messier built under a new management team of Chairman Jean-Rene Fourtou and CEO Bernard Levy. The new management went back to being profitable and stable.

Winner’s Curse Hypothesis of Takeovers

Winner’s Curse was first coined by three engineers at Atlantic Richfield who discussed auctions for oil drilling rights and the bidding challenges for assets whose true value is difficult to estimate. Those who succeed in the bid can be cursed by putting forward a winning bid that exceeds the value of the assets. Thaler has shown how the winner’s curse works in different situations, even in mergers and acquisitions.

The curse of takeovers is most likely won by bidders because they are more likely to pay more and outbid contenders who are more accurate in value. This is a natural outcome of any biding competition. One of the more public forums where this usually happens is the free-agent markets of sports like baseball and basketball. In a study by Varaiya, he used 800 acquisitions from 1974 to 1983 and found that on average gains by as much as 67%. Overpayment is considered the difference between the winning bid premium. It demonstrates the existence of the winner’s curse, which then supports the hubris hypothesis.

The Bad Bidders, The Good Targets

In a study of 1, 158 companies, Mitchell and Lehn analyzed their control transactions. From 1980 to 1988 found that companies that make acquisitions show that takeovers are both a blessing and a curse. Those that reduce market value may be bad deals. Assuming the market accurately assess them, and this is the challenge. However, the deals market may take care of the problem through another takeover of a “bad bidder.” When the negative market impact of bad deals is considered. Then it is clear that good acquisitions should have a positive effect on share values. While bad deals should cause the stock price of the acquirers to decline behind the market.

It is a good thing that there is evidence where the corporate governance process may resolve the poor performance of the bad acquirer CEOs. This is proven by a study of 390 firms over the period 1990–1998 by Lehn and Zhao. The researchers found that there is an inverse relationship between the returns of acquiring firms and the possibility that the CEOs would be fired.

© Image credits to Elina Krima