Rock Products - The Leading Voice of the Aggregate Industries.

M&A Creates No Short-Term Value


Firms undertake mergers and acquisitions for a variety of reasons. They do it to gain access to new technology, know-how, patents, or brands. They do

Firms undertake mergers and acquisitions for a variety of reasons. They do it to gain access to new technology, know-how, patents, or brands. They do it to improve or sustain their market power, or to achieve economies of scale and scope. In the United States alone, deals announced in the last decade amount to more than $10 trillion. Yet analysis of research on mergers and acquisitions concludes that ó on average ó mergers and acquisitions fail to create short-term value for the owners of the acquiring firm.

Intrigued by the question of why managers pursue such deals even when they do not improve shareholder wealth, UW-Milwaukee researchers Ravi Dharwadkar, Pamela Brandes, and Maria Goranova examined the implications of simultaneous ownership and the consequences of overlapping institutional ownership, whereby owners may have simultaneous stakes in both the acquirer and the target to an M&A deal. They further studied 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.

They found that shareholder losses in acquiring firms were clearly related to the level of overlapping ownership. In M&A deals involving no overlapping institutional ownership, the acquiring firm value went down by $1.6 million. In contrast, the acquiring firm value fell by $111.7 million in deals with overlapping ownership stakes.

Interestingly, a further examination of the overlapping deals revealed that those with less overlap (the bottom 25% 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% of overlapping deals) were associated with an average loss of $379.8 million for acquirers.

These results held true for both the number of overlapping owners involved in the deals as well as the percentage of ownership overlap. 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 researchers conclude that managers pursue suboptimal deals because overlapping and nonoverlapping owners have different interests in such deals ó that overlapping owners who may lose on the acquirer's side may make up for this loss on the target's side of the deal.