Latepost Acquisition Hubris: Over Confident Ceos In Addition To Compliant Boards

In my final post, I noted that acquisitions are to a greater extent than probable to destroy value for acquiring theatre stockholders than to add together value, together with that at that topographic point is picayune prove that companies acquire from history. That is puzzling, given the manpower, information ability together with model ability that is brought into the acquisition process. How tin all these smart people working amongst sophisticated models together with updated information travel so incorrect so often?

The response I mean value lies inwards a unproblematic fact: inwards most acquisitions, the conclusion to acquire is made kickoff together with the analysis follows, together with all besides often, the conclusion is non alone made at the meridian of the organization, but at the very, real meridian past times the CEO. That is non the agency organizations are supposed to work. Big ideas, no affair who originates them, are supposed to travel discussed honestly together with openly, analyzed fully together with and so vetted past times an independent, good informed board of directors to brand certain that stockholder interests are beingness served. That may withal come about inwards some organizations, but consider this alternate reality. In a minute of inspiration (insanity) or brilliance (lunacy), the CEO decides to practise an acquisition of a target theatre for strategic (empire-building) reasons. The managers or so him or her, recognizing that the perish has been cast, pick out non to vocalism their opinions, acquire bulldozed when they do, or create upwards one's hear to bring together the CEO inwards pronouncing the acquisition a slap-up idea. An investment banker is institute to affirm that the bargain is, inwards fact, a slap-up bargain together with the residual equally they order is history. Reminds yous of James Stew art's article on the HP/Autonomy deal and peculiarly at the dorsum story on how Leo Apotheker, HP's together with so CEO, pushed for the bargain fifty-fifty equally at that topographic point were enough of doubting voices (both inside together with without the firm), together with how the board essentially went along amongst his wishes. Then, movement on to conduct maintain a hold back at these stories most articles.latimes.com/1995-08-01/news/mn-30178_1_walt-disney/2" target="_blank">Eisner's usage inwards Disney's acquisition of Capital Cities inwards 1995 together with Zuckerberg's usage in article/SB10001424052702304818404577350191931921290.html" target="_blank">Facebook's buy of Instagram before this twelvemonth to consider how much head-strong CEOs tin influence the acquisition process.

If the acquisition procedure is prone to failure, equally the prove suggests that it is, at that topographic point are many potential culprits that yous tin blame. The investment bankers who facilitate the deals for huge advisory fees are an slow target together with the accountants/auditors who clothes upwards the books are a closed second, but the primary culprit has to travel the meridian management (and particularly the CEO) of the acquiring firm. After all, in 1 trial a CEO gets assail doing a deal, he tin become most picking the facilitators (the investment bankers together with accountants) to brand the bargain hold back good. As nosotros convey behavioral finance into play, the prove suggests that over confident CEOs play a substitution usage inwards greasing the skids for large (bad) acquisitions. To mensurate confidence, Malmendier together with Tate, who conduct maintain a serial of interesting papers on how over confident CEOs manage, developed 2 measures:

Insider holdings inwards the companies that they manage: Rather than diversify together with spread their risks past times investing inwards other companies, over confident CEOs seem to double upwards together with invest their wealth/income dorsum into the companies that they manage.
Press reports: Looking across fiscal tidings stories for mentions of the CEO inwards question, they looked for the words "confident" or "optimistic" inwards descriptions of the CEO opposed to words such equally "cautious", "frugal" or "steady". If the sometime exceeded the latter, the CEO is classified equally an over confident CEO, whereas if the latter dominated, the CEO was classified equally a cautious CEO.

They together with so looked at a sample of 394 large the U.S. firms together with institute that over confident CEOs were 65% to a greater extent than probable to practise acquisitions than cautious CEOs, though they were also less probable to describe on external financing; their over confidence led them to believe that the marketplace was underpricing their stock together with hence made them to a greater extent than reluctant to usage stock inwards acquisitions. They were also to a greater extent than similar to acquire only to diversify, together with the marketplace reaction to their acquisitions is to a greater extent than negative than to acquisitions past times cautious CEOs.

Can no 1 halt a headstrong CEO? There is a counterweight built into the system, the board of directors, and it tin human activity equally a restraint on a CEO embarking on a value-destructive path. Unfortunately, 1 mutual characteristic shared past times value-destroying acquirers is a compliant board, that shirks its responsibleness to protect shareholder interests. It is non surprising that it HP, which has had issues amongst corporate governance together with board oversight, was the ill-fated acquirer of Autonomy.

In summary, then, a headstrong, over confident CEO, combined amongst a compliant board creates a conclusion making procedure where at that topographic point are no checks on hubris together with large, value destroying actions oftentimes follow. If investors desire to forestall their firms from embarking on deals similar the HP/Autonomy deal, they necessitate to pay attending to corporate governance, together with non only at the surface level. After all, the board at HP met all the Sarbanes/Oxley requirements for a "good" board together with may fifty-fifty conduct maintain scored high on the corporate governance scores inwards 2010. The work amongst corporate governance watchdogs, legislation together with scores is that they are far besides focused on what the board looks similar together with far besides picayune on what it does. In my view, it matters picayune whether a board is pocket-sized or large, whether it is filled amongst luminaries or unknowns, experts or novices together with whether it meets the criteria for independence. It does affair whether the board acts equally a cheque on the dreams together with acts of purplish CEOs.

The Acquisition Series
HP's bargain from hell: The mark-it-up together with write-it-down 2 step
Acquisition Archives: Winners together with Losers
Acquisition Hubris: Over confident CEOs together with Compliant Boards
Acquisition Advice: Big bargain or goodness deal?
Acquisition Accounting I: Accretive (Dilutive) Deals tin travel bad (good) deals
Acquisition Accounting II: Goodwill, to a greater extent than plug than asset

Acquisition Alchemy: Creating value from deals