slickest merger of all: CEOs, cash
By Al Lewis, Columnist
Tuesday, June 26, 2007
Cash Eating Organisms -- or, as most people call them, CEOs --
are handsomely paid no matter how destructive a job they do.
This is particularly true in the case of mergers.
This is why CEOs start muttering odd words like "synergies" and
"accretive" when they are suddenly overcome with fits of
self-interest and pangs of greed.
Shareholders should remember that these cash-eating organisms
can't help themselves. They will get paid, no matter how
ridiculous the merger they propose.
That's what happens when you separate ownership from control,
which is what our corporate system has done so effectively. It's
also why academic studies consistently find that most mergers
fail to deliver the returns that chief executives initially
New research published in The Journal of Finance demonstrates
why little of what a CEO says about a pending merger can be
trusted. CEOs are too conflicted by the potential economic
"If you find out your company has a plan for growth through
acquisition, you need to look really hard at that," said one of
the study's authors, Jarrad Harford, an associate professor of
finance at the University of Washington in Seattle.
"These synergy projections rarely work out," Harford said. "Rosy
scenarios where mergers will be accretive to earnings or they're
going to have all these cost savings in the first year -- that
almost never happens."
Harford should know. He and Kai Li of the University of British
Columbia's business school analyzed merger data from the largest
1,500 U.S. publicly traded companies between 1993 and 2000.
They began with 1993 because that was the year improved
disclosure rules forced companies to list more data regarding
CEO compensation. They ended with 2000 to allow enough time to
elapse to analyze post-merger performance.
They looked at companies by an index number, rather than by
name, to keep the study purely quantitative and empirical.
Here's what they found:
Most mergers created companies that underperformed the market.
On average, a company's stock value fell 1 percent upon
announcing a merger. After three years, it fell an average of 5
percent, netting out returns attributable to the rising stock
market of the 1990s. This finding is in line with earlier
The CEOs who did these deals started out with a median
stock-and-options portfolio worth $23 million. Three years
later, this median portfolio had grown to $51 million.
CEOs who proposed mergers that outperformed the market saw their
portfolios grow by $47 million or better over three years. CEOs
who led underperforming mergers saw their portfolios grow by $14
million or better.
"You are clearly better off if you do a good merger," said
Harford, "but you are not worse off if you do a bad merger. So,
on the margin, why not do it?"
How do CEOs manage to do better, even when their companies and
shareholders do worse?
It begins with a bonus for a job well done.
"They get a big cash bonus for the extra work they had to put in
to make the merger complete," Harford said. "But we didn't even
look at that. That's gravy."
Typically, their existing portfolio of stock and options have
taken a hit as their company's stock price has fallen. But not
to worry. Boards of directors are quick to lavish more stock and
options on CEOs at the new, lower stock price created in the
"Even the ones who are doing bad mergers are getting this huge
slug of new options and stock," Harford said. "All the decision
makers ... are getting extra stuff that the shareholders
Additionally, CEOs typically get a fat raise following a merger.
They are now running a larger organization, which justifies the
Mergers are infinitely complex undertakings. There are diverse
cultures, redundant positions, disparate operations,
idiosyncratic customers and myriad other unpredictable factors
Any CEO who claims to have this all figured out is probably just
looking for his next big meal.
Al Lewis' column appears Sundays, Tuesdays and Fridays.
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