Mergers and CEO Retirement Age

In a previous post I  discussed my research on Golden Parachutes, describing the delicate balance boards face in developing an appropriate package.  Today I link to a related article on mergers by Dirk Jenter of Stanford and Katharina Lewellen of Dartmouth.  The article, entitled CEO Preferences and Acquisitions, describes an interesting phenomena, the dramatic increase in firms acquired when their CEO reaches age 65.  I had the pleasure of discussing this interesting article at a conference in Seattle last summer.  The complete abstract is below:

CEO Preferences and Acquisitions

Abstract:       "This paper explores the impact of target CEOs’ retirement preferences on the incidence, the pricing, and the outcomes of takeover bids. Mergers frequently force target CEOs to retire early, and CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs’ private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers. These results suggest that the preferences of target CEOs have first-order effects on both bidder and target behavior."



The article can be downloaded here.

All the best,

Ralph

Golden Parachutes and the Art of the Deal

In structuring any deal it is important to understand the motivations of key players on both sides.  Firms acquiring publicly traded targets must be particularly cognizant of the target firm's CEO - generally the single most important person influencing target reactions and negotiations.  But CEOs are individuals and like all of us have their own personal motivations.  In the case of an acquisition bid for their firm those motivations are influenced by many factors including a desire to do the right thing but also managerial motives like a preference for power, share ownership and the elements of the merger pay package structured by the board.  Indeed, boards must be extremely careful in structuring that package including the design of golden parachutes.  Parachutes too generous could prompt a rush to sale while parachutes too small could produce unyielding resistance to a sale.  Neither is likely to benefit shareholders.  Eli Fich, Ahn Tran and I explore these issues in a sample of 851 acquisitions in an article forthcoming in The Journal of Financial And Quantitative Analysis. We find that parachutes do indeed influence the likelihood of sale as well as the terms of the final deal.  

On the importance of Golden Parachutes

“Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives, and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified. And we're putting a stop to these kinds of massive severance packages we've all read about with disgust; we're taking the air out of golden parachutes.”

President Barack Obama

February 4, 2009[1]

Golden parachutes are more controversial today than when they first appeared over twenty years ago. Advocates argue that parachutes are a necessary part of a competitive pay package required to attract and retain talented executives. It is also argued that parachutes are beneficial to shareholders since they induce senior managers to “do the right thing” in the event of an acquisition attempt. Opponents object to parachutes because they are linked to a change in control of a company, not to its continuing or past performance. Detractors portray parachutes as guaranteeing managers “pay-for-failure,” regardless of shareholder returns. Headlines from the popular press regularly criticize golden parachutes and express widespread concern about managerial excess and the lack of pay-for-performance related to parachute payments.   Our research analyzes golden parachutes on a sample of 851 acquisitions finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia while acquirer shareholders capture additional rents from target shareholders.  The results have important implications for boards of potential targets as well as those structuring deals for acquiring firms.

The complete article can be downloaded free of charge here.

Wishing all a great weekend,
Ralph

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1  (The full speech by president Obama can be viewed at: http://www.whitehouse.gov/blog_post/new_rules/)