Since they must agree to the acquisition, M&A targets often receive the premium bid (i.e., they are often overpaid). “Acquisitions in our example generated about 27.4 percent increase in the value of target shares,” says Dr. Jandik. “But bidders, on average, overpaid and the value of bidder shares declined by 1.9 percent.”
But even though shareholders for bidder companies might lose value, bidder CEOs almost always end up richer, according to Dr. Jandik. “The number one determinant of exit compensation packages is the sheer size of assets of the company. If [you] acquire more and more and more, [you] are managing a bigger and bigger company, and can tell your board you’re underpaid.”
In the study, well-connected CEOs always received a sizable salary bump following an acquisition — an average increase of 8 percent. These raises were completely unrelated to whether the acquisition created value. Well-connected CEOs were also more likely to receive non-monetary rewards, such as honorary degrees or alumni awards, even as their companies experienced financial downturns.
“CEOs initiated acquisitions that harmed shareholders, but they themselves end up richer,” said Dr. Jandik. If the world of finance and corporate governance were functioning properly, safeguards would prevent this type of behavior — but those safeguards are more likely to come into play only if the CEO isn’t well-connected. Indeed, research suggests poorly connected CEOs who initiate low-value deals do face some risks, such as dismissal within five years or another company targeting their underperforming firm for a takeover.
But if the CEO is well-connected, many of these safeguards are diminished. Despite post-M&A stock value losses, well-connected bidder CEOs were unlikely to be dismissed by their boards and their companies were less likely to be targeted for acquisition. “For well-connected CEOs, others aren’t going to go up against them,” says Dr. Jandik. It comes down to these CEOs’ ability to control information, their more numerous and influential friends and the resources they have to fall back on — all of which combine to create a sort of halo effect that can hinder internal and external intervention.
The study comes with a one caveat, since it relates to shareholders and S&P 1500 organizations — the largest publicly held corporations in the world. How might these findings translate to smaller hospitals and health systems? I asked Dr. Jandik to weigh in.
“If it’s happening for the biggest companies in the world, where billions of dollars are being destroyed, I would think if you move to smaller companies, the power and influence of a CEO should matter more,” he said. These S&P 1500 companies are thoroughly dissected by analysts at every turn, and even that cannot prevent value mismanagement, according to Dr. Jandik. This study could have big implications for smaller organizations, as well.
