The Sources of Value Destruction in Acquisitions by Entrenched Managers
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2012-07-04
In our paper, The Sources of Value Destruction in Acquisitions by Entrenched Managers, forthcoming in the Journal of Financial Economics, we identify how acquisitions by entrenched managers destroy value. Managerial entrenchment is often seen as worsening corporate governance and facilitating agency-motivated investments. We analyze the role of entrenchment in acquisitions by (not for) entrenched firms. We focus on acquisitions by entrenched managers in order to examine the impact of entrenchment on managerial investments. We find that value-destruction in acquisitions by entrenched acquirers arises for several reasons:
- Entrenched acquirers disproportionately avoid private targets, which have been shown to be associated with value-creation.
- If entrenched acquirers do buy an unlisted target (or a public target with a blockholder), they tend not to pay with stock, thereby avoiding the governance benefits that would otherwise accrue from creating a blockholder in the bidder.
- Entrenched bidders tend to both overpay and acquire low-synergy targets, which manifest in lower combined bidder/target announcement returns and lower post-acquisition operating performance.