Target CEO Retention in Acquisitions Involving Private Equity Acquirers
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-03-04
In the paper, Does Target CEO Retention in Acquisitions Involving Private Equity Acquirers Harm Target Shareholders?, which was recently made publicly available on SSRN, we examine whether target shareholders are affected adversely when the target CEO is retained by the acquirer and if the effect differs when the acquisition involves a private equity firm. We find that private equity acquirers are more likely to retain target CEOs, and, given an acquisition is made by a private equity firm, target shareholders receive a higher premium when the CEO is retained. The difference in premium is economically large as it corresponds to 10% to 23% of pre-acquisition firm value.
The reason for this higher premium is that the CEOs retained by private equity acquirers appear to be CEOs who have performed better and hence can add more value to the firm that results from the acquisition. Further, a CEO who is retained cannot compete with her former firm and we show that the premium paid if a CEO is not retained falls with the ease with which that CEO can compete with her former firm. The fact that better CEOs are more likely to be retained and that targets receive higher premiums when the CEO is retained is inconsistent with the view that the target CEO conflict of interest leads to inefficient retention of CEOs in exchange of lower premiums.