M&As AND STEPPING DOWN MANAGERS: The impact between
the tenure of the manager and the performance of the deal.
Achillefs Daskalakis s2724677, MSc SIM
a.daskalakis@student.rug.nl
Abstract
This research is an empirical analysis examining the impact that the stepping down of the managers has on the performance of an acquisition. It focuses on how managers knowing that they will soon have to step down influence their acquisition decisions and the performance of the deal. Using the variables Step Down and M&A Performance this research will try to shed light on this subject by developing hypotheses regarding the impact that the acknowledgement of stepping down has on the performance of an acquisition, and in the relationship with the moderating effects of Tenure and Age. The results show that if a manager has served a lot of years in the company, the performance of the M&As performed after announcing his stepping down will be bad. In order to test the above, a sample of 2621 acquisitions was examined with the help of statistical analysis (STATA) using data coming from databases such as Thomson Reuters SDC Platinum, Datastream, BoardEx and Compustat with a focus on the pharmaceutical and chemical industries. The study uses an event study methodology following McKinlay (1997).
JEL Classification Code: G30, G34
Keywords: M&A, Step Down, Event Study, Acquisition, Tenure
Table of Contents
Chapter.1-Introduction ... 1
Chapter.2-Theory and literature overview ... 4
Chapter 2.1-Moderators ... 6
2.1.1-CEO’s Tenure ... 6
2.1.2- Manager’s Life-Cycle Theory ... 7
Chapter.3-Data and Methodology ... 9
3.1-Research settings ... 9 3.2-Sample Selection ... 10 3.3-Independent Variable ... 10 3.4-Dependent Variable ... 11 3.4.1- Statistical Methods ... 11 3.5-Control Variables ... 15 3.5.1 Degree of relatedness ... 15 3.5.2 Historical Performance ... 15 3.5.3 Leverage ... 16
3.5.4 Years In The Company ... 16
3.5.5 International ... 17
3.5.6 Market Book Ratio ... 17
3.6 Moderators ... 17
Chapter.4-Results ... 18
4.1 Descriptive Statistics ... 18
4.1.1 Deals (whole sample) ... 18
4.1.2 Stepping Down Deals (step down sample) ... 20
4.2 Hypothesis testing ... 21
4.2.1 Hypothesis 1: Stepping Down Managers and Acquisition Performance ... 21
4.2.2 Hypothesis 2: Tenure and Stepping down Managers ... 22
4.2.3 Hypothesis 3: Age and Stepping Down Managers ... 22
4.2.4Age in M&As ... 23
Chapter.5-Discussion ... 25
5.1 Practical Implications ... 28
5.2 Limitations & future research suggestions ... 29
Chapter.6- Conclusion ... 30
References ... 32
Chapter.1-Introduction
Mergers and Acquisitions (from now on M&As) can be a source of competitive advantage if executed in a wise way (Ferrer, Uhlaner, & West, 2013). The total number of reported M&As for 2014 is 31,427 with a total deal value of $2,94 trillion (Hale, 2015). As Zollo and Meier state “The study of M&A performance has been part of the strategic management, corporate finance, and organizational behavior literature for decades.” (Zollo&Meier, 2008).
Extended research has proven that mergers and acquisitions destroy the value of the firm (Moeller et al, 2005). Despite the fact that a large majority of mergers fail to deliver profits, firms in every industry continue to see mergers and acquisitions as an answer to better performance (Haleblian, Devers, McNamara, Carpenter, & Davison,, 2009). Possible explanations for this are putting forward by the empire building theory (Trautwein F. , 1990) (Scherer, 1987) and the statement by Roll in his seminal paper, where he states that directors may overestimate takeover gains because of their self-confidence (Roll, 1986) (Tate, 2008).
Taking into account agency literature and especially the seminal work by Berle and Means of 1933, together with various theories of the firm (Baumol, 1959) (Williamson, 1964), and the theory of mergers and acquisitions (Mueller, 1969) we note that mangers tend to use mergers and acquisitions in order to maximize their personal gain (Trautwein F. , 1990). So we can understand that they seek their self-interest. Agency theory talks about self –serving managers, those who on purpose subject the company to loses in order to gain some personal interest. Agency theory can be divided in two streams: a) The Managerial
Entrenchment Theory, which assumes that managers take the lowest risk possible in order for
(Shleifer&Vishny, 1989)]. Agency concerns are thus mitigated through a system of internal controls, such as information systems; rules, norms of conduct and a reward structure designed in a way that ensures the interests of principal and agent are aligned (Eisenhardt, 1989). Shareholders have a number of tools at their disposal when it comes to preventing the risk of managers making bad calls. For example, in the U.S., shareholders can resort to class-action security lawsuits to seek damage for improper or misleading managerial class-actions (Bourveau; Brochet& Spira, 2014).The agency problem is particularly salient in the context of M&A transactions. As agency problems are inherent in acquisition decisions, M&As often incur some of the most significant resource allocations made by managers. If bad decisions are not prevented by incentive alignment mechanisms, then the last deterrent remains the fear of being replaced and having one’s reputation tarnished(Sokolyk, 2014).
But what about the managers that know they will step down? Here, corporate governance is no longer a threat to them so they can act however they like in order to gain some final interest. We can understand that they will not have a chance for further maximizing their utility from mergers and acquisitions, although they would like to gain some last revenues, given that they have nothing to lose, neither from career matters nor from income. If they make a great acquisition their name will outlive them in the market, if the acquisition does not work, it is the next manager’s problem. It is thus easily to envision that managers which are aware of their impending step down, will make more reckless acquisitions. The study then looks at how the performance of acquisitions is impacted by this step down effect, and if this is in any way moderated by the manager’s age or tenure with the company.
One way to explain this result is that managers may feel overconfident as the years go by, but further explanation will be given in the forthcoming chapters.
By addressing the topic of M&As and stepping down managers this research aims to contribute to the Agency Theory and to the Behavioral Theory for Managers. However, there is still a literature gap in the theoretical explanations as far as retiring managers and their impact on the performance of M&As is concerned. Although, manager age has already been examined as a factor that impacts M&As (Yim, 2013) the effects of acknowledging an imminent stepping down, to my knowledge, was not. With the help of a large sample of mergers and acquisitions used, these findings backed by empirical evidence will provide managers and scholars with significant and useful insights, pertaining to both M&A performance studies, and the corporate governance field.
Based on the goals of this research and the contributions aimed at the existing theories, this study considers the different role and motivations of stepping down managers and addresses the following research question
RQ: Is the acknowledgement of stepping down by the managers responsible for the high risk M&As they are participating?
Chapter.2-Theory and literature overview
Stepping Down Managers
An article from Forbes in 2005, suggests that managerial loudness declines with age (Reeves, 2005). So we can understand that older managers are less likely to be involved in some bad mergers and acquisitions. Also Yim states in his 2013 article “Physiological changes that occur with age can make older CEOs less inclined to pursue acquisitions.” (Yim, 2013).
Research in the previous years focused more on the process side of M&As and on the characteristics of firms and deals instead of the human factor [ (Trautwein F. , 1990) (McCarthy & Dolfsma, 2012)]. This study goes one step beyond and further elaborates on the particularities of managers.
In their article of 1996 Prendergast and Stole argued that younger managers try to signal their high managerial quality to the market by pursuing riskier strategies. “In particular, younger managers overweight their personal beliefs and exaggerate their investment behavior to appear talented” (Prendergast, 1996). Because younger managers have more working-years left ahead than older ones and also considering Entrenchment Theory, the incentives to perform M&As are supposed to be more salient in their case. In contrast, older managers do not like change and it is likely that their investment behavior remains the same; because if they do change their behavior, this signals that their previous investing activities and strategic
decisions were wrong (Prendergast, 1996). Additionally Bertrand and Schoar in their 2003 article argue that older generations of CEOs appear to be more conservative in their
decision-making (Bertrand&Schoar, 2003). In both these situations we can again see the agency
problem being likely, where managers pursue their self-interested.
(Acharya, Gabarro, & Volpin, 2012). Corporate governance is then a ‘carrot and stick’ type of tool, designed to scare managers into perform well and for the good of the company.
The important element in this research is what happens when a manager faces retirement, and to be more specific, what happens when he knows that “tomorrow” will be his last day as a manager. Do corporate governance mechanisms lose significance in such a scenario? Again, here we can assume that the corporate governance no longer applies. To be more specific there is no longer any effective mechanism stopping these managers try to build empires. The first problem that can occur for the CEO and the board is when a CEO approaches retirement and has to acknowledge that one day his association with the firm will come to an end. In many firms, managers are traditionally required to step down at a certain age, and plan according to it. There are a lot of examples of managers that remain active during their retirement, through being on a board as independent directors, entering politics, acting as consultants, and so on (Brickley;Linck;Coles, 1999).
This research will try to understand how these psychological factors on CEOs behavior affect the performance of M&As.
Professor Kets de Vries in his 2003 article about the retirement syndrome argues that CEOs cannot accept the fact that their career is ending. More specifically he states that “Letting go is so difficult for some leaders that they insist on remaining in a position of power even when they themselves feel that they have accomplished all they can”. It is like a small death that happens at this point, since the businessman dies and the average man is replacing his position. “Many people equate leaving a lasting legacy with defeating death” (Vries, 2003).
CEOs have a psychological need to leave a legacy of accomplishments, so when it comes to stepping down managers, we can reason that they perform mergers and acquisitions in order to satisfy their ego and also built and protect their legacy (M Puffer, JB Weintrop, 1995).
“Your true legacy as a CEO is what happens to the company after you leave the corner office. (Freeman, 2004). In the author’s point of view, stepping down manager want to do a last fancy move, and they do not care about the effects, since they will simply not be there.
They, and especially the ones close to retirement, are free to take high risks acquisitions, as a last fancy move that they may wanted all of their lives (Hong, 2000) (Chevalier&Ellison, 1999). Some may argue that they only care about the compensation and the perquisites (V Bodolica, 2007) that they will gain from this last move, but again the author of this study suggests that their legacy and reputation is a very important factor in that decision.
Therefore, the study hypothesizes that stepping down managers for this last strategic decision will not take into account the risk and they will just act with egotism.
H1: Stepping down managers make bad acquisitions
Chapter 2.1-Moderators
Taking into account the fact that bidder firms fail to create value from M&As, research has focused on the moderating effects between M&A performance and management (Haleblian, Devers, McNamara, Carpenter, & Davison,, 2009). This research takes into account these moderating effects focusing on manager’s characteristics.
2.1.1-CEO’s Tenure
The first proposed moderator in this research is CEO’s tenure. By tenure, the years that he/she served in the position were taken into account.
Multiple studies found that when CEOs have long tenure they lose their appetite for knowledge acquisition and for development [ (Audia, Locke, & Smith, 2000) (Hambrick & Fukutomi, 1991) (Kroll, Toombs, & Wright, 2000)], and so they are not any more committed to learn something new (Finkelstein & Hambrick, 1996), and this results negatively for the M&A performance [(Miller D. , 1990) (Miller, 1993)]. Taking into account the contingency theory (Miller D. , 1991) we can understand that long tenured managers have trouble assessing circumstances correctly if they find them different from their past experiences.
It appears that they frequently link previous situation making them as a generalized rule into new acquisition harming performance [ (Kiesler & Sproul, 1982), (Mazer, 1994)]. It is expected that stepping down managers who have a long tenure in the company to perform worse.
H2
:
Stepping–down CEOs with long tenure in the company perform worse acquisitions.2.1.2- Manager’s Life-Cycle Theory
Younger managers that are less experienced than older ones are more likely to be fired if they perform worse. They tend to take fewer risks because they want to keep their positions in the company and not risk unemployment (Chevalier&Ellison, 1999) (Hong, 2000). But this is not always the case as Yim (2013) finds strong financial incentives for managers to make transactions while they are young.
In this point the concept of Manager’s Life-Cycle Theory is developed. At the basis of the Manager’s Life-Cycle Theory, age matters in strategic decisions. Manager’s Life Cycle Theory talks about the characteristics of managers that correspond to their age, behavior and actions. Taking into account the Agency Theory and the Behavioral Theory of Managers and putting the effect of age in it we can conclude to a theory named Manager’s Life Cycle
Theory, as a mix of Management theories and the age factor. This research extends Agency
theory by considering that outgoing CEOs behave and perform in a specific way, and have different motivations to acquire firms.
Proposition: Manager’s Life Cycle Theory- The impact age has on the performance of the manager and how this make a cycle from young and risky to older and risk averse.
Psychological changes also affect acquisitions when the influence of age is counted in. Overconfidence as proposed by Roll (1986) is a great determinant in the acquisition literature. CEOs tend to pursue acquisitions that destroy the value of the company only because they feel that due to the fact that they are old and wise they have the ability to see the bigger picture. The fact is that due to this overconfidence they perform in a bad way. Although some studies suggest that overconfidence is a characteristic of younger people [ (Taylor, 1975) (Forbes, 2005) (Kovalchik et al, 2005)], other studies suggest that it is difficult to say whether this is a characteristic of older or younger managers (Doukas&Petmezas, 2007) (Billet&Qian, 2008). Again the important factor here is the decision to step down (or retire) because of being old that can harm the CEOs’ clear view of things and make them pursue acquisitions that are not company’s best interest but have a meaning of egotism.
So it is expected that stepping down CEOs that are older will perform worse than younger ones.
Chapter.3-Data and Methodology
3.1-Research settings
This research used data obtained from the Thomson Reuters SDC platinum, Datastream, Compustat (Execucomp) and BoardEx. The Thomson Reuters SDC Platinum is a financial database that contains and analyzes all the financial transactions (in this case M&A deals) and in general several financial topics (Thomson Reuters, 2016). It contains information for over 900,000 M&A deals in a global setting from 1970s until today (Thomson Reuters, 2016).
Datastream, which provides global financial data such as stock prices, equities, options and more, was used thoroughly in this research in order to come to the final results. (Thomson Reuters, 2016). Datastream provided the research with the necessary daily stock price information for the parent firm that performed M&A deals and in general for the market.
As for BoardEx and Compustat (Execucomp) further explanation will be given in later section of the paper where the independent variable is explained.
3.2-Sample Selection
The sample includes deals satisfying six conditions: (1) the deal is announced between January 1, 1992 and December 31, 2012; (2) the acquisition is completed;(3) as for the Pharmaceutical industry the sample considers the Global top 50 firms for 2014 (Cameron, 2014); and for the Chemical industry the sample considers the US top 50 firms for 2014 (Tullo, 2014); (4) The focus is on the Parent firm; (5) variables necessary to run the analysis are not missing and (6) the CEOs are taken from the Parent firm of the Acquirer. Additionally, firm specific data was attained from DataStream, including firm data on Return Index and market-to-book ratio. The selection process produced a sample of 2621 M&A deal observations and 130 firms. After eliminating events with missing data, it resulted in 2244 acquisitions of 98 firms.
3.3-Independent Variable
CEO step down is used as the independent variable in this study. The main sources of CEO step down are BoardEx, LexisNexis and Compustat’s Execucomp database over a period of 20 years (1992-2012). As step down, this study defines the decision (or the
obligation) of a manager to move into less senior positions in the firm or outside of it. It
means that from now on, the former manager will no longer be in this position until he retires (if he has not done it already). In this point it has to be said that following the example of several papers [ (Brickley;Linck;Coles, 1999), (Farber, 2005), (Shivdasani;Yermack, 1999) etc.] the age of retirement is pointed between 60 and 65 years old. A total of 184 stepping down CEO cases were found. The BoardEx database, which used for primary data on CEOs outside of the U.S., contains biographical information on most board members and senior executives around the world.
The procedure followed four steps: (1) Examining every company from the lists through Google Search in order to identify its existence, (2) Searching for this company both in BoardEx and Compustat. In order to find CEOs in BoardEx the search included also the key words “Chairman”, “President” and “Founder” to be covered for any mistake or misunderstanding, (3) Checking for newspaper articles from LexisNexis to support the findings. For a proper triangulation of the data, crosschecking between BoardEx, Execucomp and LexisNexis gave the research the needed results and made eliminations on the sample and (4) everything was gathered in an excel file in order to be examined by the author for any mistake.
3.4-Dependent Variable
The dependent variable used for this research is firm performance. Given the research’s focus on agency theory and therefore, shareholder wealth creation, the cumulative abnormal return (CAR) of acquiring firms around the announcements of a merger and acquisition will be used as a metric for performance. The cumulative abnormal return (CAR) reflects investors’ response to the announcement of an acquisition, based on present expectations about the future cash flows of a combined firm (both bidder and target).
3.4.1- Statistical Methods
a) Event window
In order to conduct the event study and assess the performance of an acquisition, event and estimation windows were established. The study used a small (5-day) event window [-2,2] that can depict the same as a very large one (Zollo & Meier, 2008). The event window consists of the days before and after the acquisition announcement and it has to be bigger than the day of the acquisition itself. The last part is important in order to compute the abnormal stock returns around the days of the acquisition. To calculate the returns a benchmark was used with market indices on which the 98 firms were registered. In some points a second market index was used in order to compute the returns due to lack of data in the first. The most common indices were S&P 500, FTSE WORLD, and DOW JONES GLOBAL.
The author followed this tactic in order to see if the slope of the acquisition follows the market, in example because of an incident (crisis, terrorist attack) or because of the acquisition itself.
Figure 2 displays the timeline for the event window, where the event announcement is equal to τ = 0, and the entire window of the event is the time between T1 and T2. As we can see the window is 5 days.
b) Parent firm abnormal returns.
By the time the acquisition is announced we can see a change in the stock price of the
firm due to the event that took place. So now we can clearly see the abnormal returns. The sum of the abnormal returns gives us the cumulative abnormal returns (CAR) (Duso, Gugler, & Yurtoglu, 2010). Here the method of computing the CARs is depicted.
𝐴𝑅!" = 𝑅!"− 𝐸𝑅!"
(1)
Here in equation 1 we can see the calculation of abnormal returns, where ARit are the abnormal returns, Rit the realized returns and ERit the normal returns for a period τ.
Equation 2 depicts the return of any stock i as follows (MacKinlay, 1997):
𝛦 𝑅!" = 𝛼!+ 𝛽!𝑅!" + 𝜀!"
E(𝜀!" = 0) (2)
In equation 2 Rit and Rmt are the returns on the τ, for i and market. The Rmt is the compositions of the benchmark explained before. The αi stands for the intercept i coefficient, the βi stands for the slope, and the εit is expected to be 0 (zero) (MacKinlay, 1997).
The αi and βi can be calculated as follows:
(4) where: 𝜇! = 1 𝛵!− 𝛵! 𝑅!! !!!! !!!! (5) and: 𝜇! = 1 𝛵!− 𝛵! 𝑅!! !!!! !!!! (6)
Having calculated these parameters (that are subtracted from the realized return), it is time to calculate the abnormal returns. Error expected to be 0 (zero)
𝐴𝑅!" = 𝑅!"− 𝛼! − 𝛽!𝑅!"
(7)
As stated before the Sum of the abnormal returns result in the CAR. Here is the equation of how to calculate the Cumulative Abnormal Returns.
Ordinary Least Squares (OLS)
The OLS regression is used in this study, for testing the hypotheses using some controls and data, in order to see what the effect the independent variable has to the dependent (Chen, Lesmond, & Wei, 2007). The data were clustered per SIC code in order to account for industry specific differences (Akdogu, 2009). The clustering was performed at a 2 digit SIC code level.
3.5-Control Variables
Prior literature shows that a number of firm-and deal-specific characteristics affect M&A behavior and M&A performance (King, 2004). Therefore, control variables are included in the model to account for several effects.
3.5.1 Degree of relatedness
Degree of relatedness was obtained by comparing the standard industrial classification (SIC) code of the acquiring firm with that of the acquired firm. Adapting the methodology of Rumelt (1974), Bergh (1997) and Anand & Singh (1997), each acquisition is positioned on a scale from 0 to 4 as follows: the acquisition was coded 0 if the acquired firm and the acquiring firm are in the same 4-digit SIC code, 1 if they are in the same 3-digit SIC code, 2 if they are in the same 2-digit SIC code, 3 if they are in the same 1-digit SIC code, and 4 if their SIC codes are different. (Bergh, 1997) (Rumelt) (Anand & Singh, 1997) Empirical studies using abnormal returns (Markides C, 1998); (Haleblian J, 1999) and acquisition survival (Pennings JM et al, 1994) in order to measure performance have indicated a positive relationship between the degree of relatedness and acquisition performance. Degree of Relatedness is one of the most discussed variables in M&As literature [(Nahavanndi & Malekzadeh, 1988) (Shimizu, Hitt, Vaidyanath, & Pisano, 2004) (Porter, 1980)].
3.5.2 Historical Performance (ROA)
This research uses this variable in order to control for the acquirer’s performance. Return on Assets is said to be one of the most important measures in order to describe firm performance (Barber & Lyon, 1996). Firms with greater prior performance, due to the fact of having a good management team will tend to perform better in M&A decisions (Morck, Schleifer, & Vishny, 1990).
3.5.3 Leverage
Leverage is defined as debt divided by the market value of assets, where debt is the total book value of assets excluding the book value of the equity. Rajan and Zingales in their 1995 paper found that bigger firms are more leveraged, and so through diversification they fail less often (Rajan & Zingales, 1995). That is something important for this research as we take into account the biggest companies in the field. With higher leverage, managers tend to have more incentives to improve the performance of the firm in order to pay off loans and because there is a possibility of finishing the relationship with the company, due to financial hazards. So, from the above, we can understand that firms with high leverage have less cash to spend and so it is more likely for bad acquisitions to take place [ (Lang, Stulz, & Walkling, 1991) (Lang, Stulz & Walkling, 1991)]. On the other hand, Maloney, McCormick and Mitchell (1993) state that firms with higher leverage perform better when it comes to M&As (Maloney, McCormick, & Mitchell, 1993).
3.5.4 Years In The Company
3.5.5 International
This control is about whether the transaction took place in a domestic or an international panel. When it comes to international strategy, evidence show that companies that follow an international strategy are keener on performing foreign direct investments than multidomestics, and that companies that follow a multidomestic strategy tend to acquire more (Harzing, 2002).
3.5.6 Market Book Ratio
This control is the market value divided by the book value of equity. Following Dong et al. (2002) it is expected that firms with a higher market-to-book ratio will perform worse when it comes to M&As (Dong, Hirschleifer, Richardson, & S.H., 2006). However, Rajan and Zingales in their 1995 paper state that when firms have lower market to book ratio lack in investment opportunities. McCardle and Viswanathan in their 1994 paper are talking about the fact that when no internal opportunities occur, firms try to acquire other firms and create opportunities for growth (McCardle & Viswanathan, 1994). In such a situation the stock market may react negatively given the fact that the internal investment possibilities are obsolete and this may create negative cumulative abnormal returns without caring if the acquisition will be successful later in the year (Rosen, 2004). Based on this research where the Cumulative Abnormal Returns where in a lot of cases negative, the market book ratio is an important control. 3.6 Moderators
Chapter.4-Results
4.1 Descriptive StatisticsThe first table shows the number of stepping down managers in both chemical and pharmaceutical industries between 1992 and 2012. Here we can see that only 8,2% (184 acquisitions) out of the 2244 in total were executed by managers that were at the time of the transaction, about to step down.
4.1.1 Deals (whole sample)
Another very important fact is that out of the 2244 51,2% were in the same industry based on the SIC codes. From that we can understand that almost half of the acquisitions were less risky than other based in the degree of relatedness. Here the managers are likely that they did not look only their personal interest and they tried to make safer deals.
It is interesting to see that the acquisitions that had a perfect match when it comes to SIC codes (industry group, major group, and division) are only the 27.81% of the whole sample.
Table.1: Stepping Down Effect
Step down (yes/no) Frequency Percent Cumulative
NO 2060 91.8 91.8
YES 184 8.2 100
Total 2244 100
Table.2: 2-digit SIC code relation
2-digit relation Frequency Percent Cumulative
NO 1095 48.8 48.8
YES 1149 51.2 100
Here there is a table with all the SIC codes relations that can help realizing the amount of risks managers took in these transactions.
Out of 2244 cases the age of the managers of 2217 acquisitions were found, due to the fact that in some cases there were no data or data from other sources were not significant. The ages found were between 33 and 82 years. Table 5 shows this effect.
Table.5: Manager’s Age in the time of Acquisition
Variable Observations Mean Std. Dev. Min Max
CEOs Age in Acquisition 2217 56.69418 5.850987 33 82
Table.3: 4-digit SIC code relation
4-digit relation Frequency Percent Cumulative
NO 1620 72.19 72.19
YES 624 27.81 100
Total 2244 100
Table.4: Degree of relatedness
Relatedness Frequency Percent Cumulative
Next we can see the table summarizing the tenure of the managers in the sample. We can see that the tenure is between 0.5 to 44 years of experience. This stands also for the step down deals.
Table.6: Tenure of the managers (for both whole and step down sample)
Variable Observations Mean Std. Dev. Min Max
Tenure as CEO 2207 8.681921 4.663967 0.5 44
4.1.2 Stepping Down Deals (step down sample)
When it comes to stepping down managers we can see that the option of acquiring a company that lies in the same industry is even stronger than when examining the whole sample, close to 54%.
As for this table, the result that came from a perfect (4-digit) match acquisition, we can see that they are similar to the whole sample, and they are 24,46% in the total of 184 cases.
Table.7: 2-digit SIC code relation
2-digit relation Frequency Percent Cumulative
NO 85 46.2 46.2
YES 99 53.8 100
Total 184 100
Table.8: 4-digit SIC code relation
4-digit relation Frequency Percent Cumulative
NO 139 75.54 75.54
YES 45 24.46 100
Here, again, there is a table with all the SIC codes relations that can help realizing the amount of risks stepping down managers took in these transactions.
Out of 184 stepping down cases, the ages of the managers were between 39 and 76 years. Table 10 shows this effect. We can see comparing to the whole sample table (5) that min is 6 years bigger and max is 6 years smaller.
Table.10: Stepping down Manager’s Age in the time of Acquisition
Variable Observations Mean Std. Dev. Min Max
CEOs Age in Acquisition 184 61.36957 4.492173 39 76
4.2 Hypothesis testing
4.2.1 Hypothesis 1: Stepping Down Managers and Acquisition Performance
Hypothesis one examines the effect stepping down managers have on M&A performance. It suggests that stepping down managers perform worse than average when it comes to M&As. This hypothesis is tested by means of OLS regression. Model 11 reports the existing control variables, as we used them based on the literature. Model 2 reports what happens when we add our independent variable in the model. As it can be seen
step down has no perceived effect on the performance of M&As recorded in our sample.
Table.9: Degree of Relatedness
Relatedness Frequency Percent Cumulative
The increase in R-squared shows that the second model with the adding of the stepping down effect increases the amount of variance performance explained. Contrary to expectations, we can see that there is no significant or negative relationship between the stepping down effect and the performance of the M&A. It can be said that these results suggest that when a manager changes “alone” without accounting for any interacting (moderating) effects. Based on the controls of the existing literature, there is no change in M&A performance. Based on the findings of Table 11 (Models 1,2), we can see that hypothesis 1 is not supported.
4.2.2 Hypothesis 2: Tenure and Stepping down Managers
Hypothesis 2 tests the effect the tenure of the stepping down managers will have upon the performance of the M&A. Model 32 reports that when adding the moderating effect that tenure has in the stepping down and M&A performance relationship we have a negative and significant effect. We can also see that the moderator is positive and significant. Another important fact is the role of the control variable “years in company” that is negative and significant. The finding here is that when it comes to M&As, if the stepping down managers have large tenure in the position (and also in the company) they perform worse in their “last” acquisition. Tenure works as a missing variable in this case that after adding it we have the expected result.
Again, the increase in R-squared (0.001-0.003) shows that the second model with the adding of the stepping down effect increases the amount of variance performance explained. So, in accordance to the expectation Hypothesis 2 is supported.
4.2.3 Hypothesis 3: Age and Stepping Down Managers
Hypothesis 3 is about the role of age in the stepping down and M&A performance relationships. It is hypothesized that older managers that are about to step down perform worse in acquisitions. So to make this clear we are looking for the interaction effect of age between stepping down and M&A performance relationship. Model 4 reports that there is an insignificant, negative relationship in the stepping down effect with the adding of age as a moderator.
Contrary to our expectations it seems that age does not have an interaction in the relationship between the dependent and independent variables. The findings explain that the age of the stepping down manager does not play a role to the M&A performance. Based on the findings, we can see that Hypothesis 3 is not supported.
4.2.4 Age in M&As
An interesting fact that we can examine from Model 43 is that Age in the time of the Acquisition plays a negative and significant role. This finding depicts that in general age matters when it comes to M&As, a finding in accordance with the work of Yim (2013). It thus emerges that as they get older, managers do tend to perform value-destroying transactions.
Performance and Age relationships
This graph shows the relationship between performance and age. It is clear that an increase in age at the time the transaction took place, negatively influences the deal’s performance. A downward sloping trend is identified, the implications are simple, the greater the age, the slimmer the chances that the deal performs well.
-.0 2 -.0 1 0 .01 .02 30 40 50 60 70 80
CEO's Age in Acquisition
95% CI Fitted values
VARIABLES Model (1) Model (2) Model (3) Model (4)
Step Down 0.00187 -‐0.00653** -‐0.0283
(0.00190) (0.00315) (0.0258)
Tenure (moderator) 0.000290**
(0.000123)
Years in company -‐9.97e-‐05**
(3.79e-‐05)
Age (moderator) 0.000523
(0.000419)
CEO’s Age in Acquisition -‐0.000350***
(0.000103) International Transaction -‐0.000186 -‐0.000219 -‐0.000270 -‐0.000103 (0.00140) (0.00140) (0.00142) (0.00141) ROA 0.000160 0.000195 0.000205 0.000544 (0.00146) (0.00146) (0.00161) (0.00154) Relatedness (2-‐digit) -‐0.00137 -‐0.00138 -‐0.00175 -‐0.00153 (0.00119) (0.00120) (0.00121) (0.00118) Leverage 0.000229 0.000222 -‐0.000318 0.000141 (0.000792) (0.000792) (0.000672) (0.000812)
Market book ratio -‐0.000547 -‐0.000581 -‐0.000642 -‐0.000753
(0.00136) (0.00136) (0.00148) (0.00144) Constant -‐0.00248 -‐0.00285 0.00249 0.0155 (0.0108) (0.0109) (0.0111) (0.0121) Observations 1,981 1,981 1,959 1,960 R-‐squared 0.000 0.001 0.003 0.003
Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
Table 11 shows the significance of the variables as a summary of all the tests that took place in order to come up with the results based on the Hypotheses.
Chapter.5-Discussion
The results of this research aim at identifying if stepping down managers of the parent firm have any significant effect on the ultimate performance of the M&A transaction. This relationship was analyzed with an event study methodology, where the measure of performance was the cumulative abnormal returns (CAR). For this, a sample of 2244 mergers with 184 stepping down managers over a period of 20 years was used. In addition, two moderating effects were considered: the tenure of the managers, and their age. Based on the results of the previous section, the following key findings were found:
1. Stepping Down managers perform better in M&A deals
2. There is a moderating effect between the tenure of the stepping down managers and the
M&A performance.
We can see that when adding tenure as a moderator, there is a negative and significant effect between the performance (CAR) and the stepping down of the managers.
VARIABLES Model 2 Model 3
Step Down 0.00187 -‐0.00653**
(0.00190) (0.00315)
Tenure (moderator) 0.000290**
(0.000123)
The previously insignificant stepping down effect after adding tenure reversed to negative and became significant. This leads us to understand that when a transaction is about to take place by a stepping down manager if he has a long tenure in the company it is more likely that the performance will be worse than average. We can see that the results are not so strong but the negative and significant relationship does take place.
As noted in the theoretical section, long tenured managers may link those last deals with previous ones and act with egotism. They, blurred by their previous experience, destroy the value of the company and subsequently that of shareholders. They do not have the ability to judge correctly their moves. They have conducted bonds with the company that does not let them see clearly the possible hazards of their last M&A.
While the stepping down managers have in general spent more years in various positions in the company, tenure refers to the time they have spent in the CEO’s seat. While general experience may account for a better understanding of the company and its inner mechanisms, and a better alignment of interests, time spent as CEO may lead to less desirable situations. As the saying by Lord Acton goes ‘power corrupts, absolute power corrupts absolutely’, CEO entrenchment seems to negatively impact M&A performance. Spending increased amounts of time holding the ultimate position in the company, managers may fall prey to temptations and put their self-interest first.
While increased power might lead to incentive misalignment, increased tenure as manager can also lead to managers growing ‘stale in the saddle’ (Miller, 1991). Problems such as groupthink (Janis, 1971) and being too accustomed to old practices may lead to poor understanding of the environment and eventual lacking M&A performance.
3. There is no moderating effect between the age of the stepping down manager and the
M&A performance
Contrary to expectation, age as a moderator did not play a significant role. We can see that it did not play a strong role whether the manager was old or young. The results show that there is a negative effect for the step down but as for the moderating effect of manager’s age there is a highly insignificant one.
VARIABLES Model 2 Model 4
Step Down 0.00187 -‐0.0283
(0.00190) (0.0258)
Age (moderator) 0.000523
(0.000419)
CEOs Age in Acquisition -‐0.000350***
(0.000103)
A very important finding comes from the relationship of the age of the manager in the time of the acquisition. It is easy to understand that managers had different ages when they performed the deals and that variance gave this result. There is a negative and significant relationship with the performance of the M&A. So, we can understand that whether you are old or young when you step down does not really matter, but in general, the age of the manager that performs the M&A is important.
It appears that older managers do take on more value destroying acquisitions. A possible explanation for this could be the ‘growing stale in the saddle’ effect (Miller, 1991), older managers being less in tune with the current business realities, and maybe even with their own company. Another could be that of the self serving behavior, feeling that retirement is close; they could act in a way that maximizes their own utility right before they leave the field.
5.1 Practical Implications
In the context of CEO step down the results reveal some interesting insights for the parent firm, impacting managerial decision-making. Based on these results the following practical implications are suggested:
1. Stepping Down Managers with long tenure should be discouraged to perform last-minute M&A deals.
This study’s results suggest that managers who decided to step down and have long tenure in the company and position still conduct M&As in their final days in the position and which often results in poor outcomes. Measures should be taken in order to restrain stepping down managers from performing these last-minute deals. Better board awareness of the impact of tenure could result in better supervision.
2. Age matters when conducting an M&A but not for a stepping down case
It is an undeniable fact that earth’s population ages in a very big rate. In 2013, almost 12% of the world’s population was over 65 years old. Measurements from the United Nations state that by 2050 this number will be more than double, close to 2 billion people, or 21,1% of the global population (United Nations, 2013). Subsequently, people will remain in their position for a bigger period of time in the business field.
5.2 Limitations & future research suggestions
This research has some limitations, and it is wise to be taken into account. Firstly, to say that some managers stepped down in some cases was a product of triangulation. Although this seems the right view of doing this research the author has to acknowledge that at some cases the final selection was taken from the most reliable source (either LexisNexis and articles, or Compustat). For the US industry the results are easier to find, but for European and more importantly for Asian companies most of the cases either did not came out with CEO characteristics or the same selection method was used as described above. Future research should investigate the effect of stepping down managers and M&A performance in the Asian and Indian regions more thoroughly especially when it comes to pharmaceutical firms, where they are a big part of the economy.
Secondly, as a dependent variable this research used performance. Performance was measured with cumulative abnormal return by checking every day the stock price in accordance to the event. The abnormal returns though have some limitations due to the fact that they reflect for the expected and not actual performance. However, scholars have used this type of measurement for performance before (Kothari&Warner, 2006). Other performance calculation models can be the Fama-French model, the capital asset pricing model and more. We can understand that in the basis of this study stock price reactions were used to measure the performance of the M&As and in general of the firm.
It could be argued that managers of western companies have somewhat different traits as compared to those in Asia for example, where it is sometimes a custom for managers to accumulate massive tenures and even inherit managerial positions (Spencer Stuart, 2012), (Shultz, 2011).
Chapter.6- Conclusion
The purpose of this research was to investigate the effect that the step down of the CEOs has on M&A performance. Based on the research question and a literature review on CEO age, M&A performance and agency theory, a number of hypotheses were tested. Using an initial sample of 2621 M&A deals with 184 stepping down managers over a period of 20 years, a number of conclusions can be examined.
The paper proves that stepping down managers with long tenure make last-minute destructing M&A deals. With this finding the study contributes to various theories about the role of M&As in harming firm value and especially in agency theory. Although agency theory is about managers that stayed in the firm, through this study the examination was also for managers that stepped down and in a lot of cases left the firm and even the business. The research showed that, although in a small sample of only 184 cases, the tenure of the managers played an important role.
Next to agency theory the study proposed Manager’s Life Cycle theory where age is an important factor for the behavior of the managers. The findings support the proposition and the results suggest that age at the time of acquisition matter in a negative way is interesting. Also, the Behavioral Theory for managers has from now on a new stepping stone in order to be further investigated. It is investigated thus far that age and tenure play their role in the managers’ behavior when performing M&As.
The Corporate Governance field should give more attention to these two aspects in order to assure the wellbeing of the company.
The research question of this paper, Is the acknowledgement of stepping down by the
CEOs responsible for the high risk M&As they are participating?, can hence be answered
Acknowledgements
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