The Impact of Owners in Mergers & Acquisitions

AUTHORS: Ravi Dharwadkar, professor of management, Pamela Brandes, associate professor of management, and Maria Goranova ’07 PhD, assistant professor in the Lubar School of Business at the University of Wisconsin—Milwaukee

Newswise — Mergers and acquisitions (M&A) represent important corporate activities that firms undertake for a variety of reasons, such as gaining access to new technology, know-how, patents, or brands; improving or sustaining their market power; or achieving economies of scale and scope. In the U.S. alone, deals announced in the last decade amount to more than $10 trillion. Yet analysis of M&A research concludes that — on average — mergers and acquisitions fail to create value for the owners of the acquiring firm in the short term.

Intrigued by the question of why managers pursue such deals even when they do not improve shareholder wealth, Dharwadkar, Brandes, and Goranova examined the implications of ownership from a novel perspective. In their paper “Owners on Both Sides of the Deal: M&A and Overlapping Institutional Ownership,” in Strategic Management Journal, they investigated the consequences of “overlapping” institutional ownership — whereby owners may have simultaneous stakes in both the acquirer and the target to an M&A deal. They further studied whether the negative effect of overlapping ownership is constrained by better corporate governance as measured by level of board independence, CEO duality (when the CEO also serves as chairman of the board), managerial ownership, and CEO stock options.

They found that the shareholder losses in acquiring firms were clearly related to the level of overlapping ownership:• In M&A deals where there was no overlapping institutional ownership, the acquiring firm value went down by $1.6 million. In contrast, in deals where there were overlapping ownership stakes, the acquiring firm value fell by $111.7 million. • Interestingly, a further examination of the overlapping deals revealed that those with less overlap (the bottom 25% of deals) were associated with a loss of $80.7 million for the acquiring firm. In stark contrast, deals with significant overlap (the top 25% of overlapping deals) was associated with an average loss of $379.8 million for acquirers.

The trio found that these results held true for two measures of overlap: both the number of overlapping owners involved in the deals as well as the percentage of ownership overlap. While the spread of overlapping ownership is associated with suboptimal M&A deals, effective oversight by boards constrains the negative effect of overlapping ownership. Specifically, boards with more independent directors and those having chairmen separate from the CEO role can counteract the effect of overlapping owners. The authors conclude that managers pursue suboptimal deals because overlapping and nonoverlapping owners have different interests in such deals--that overlapping owners who may lose on the acquirer’s side may make up for this loss on the target’s side of the deal.

“Our study raises the question of whether disclosure of overlapping ownership is warranted,” says Dharwadkar.