The Sources of Value Destruction in Acquisitions by Entrenched Managers

Abstract

Prior work has established that entrenched managers make value-decreasing acquisitions. In this study, we ask how exactly they destroy that value. Overall, we find that value destruction by entrenched managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, when they do buy private targets or public targets with blockholders, they tend not to use all-equity offers, which has the effect of avoiding the transfer of a valuable blockholder to the bidder. We further test whether entrenched managers simply overpay for good targets or actually choose targets with lower synergies. We find that while they overpay, they also choose low-synergy targets in the first place, as shown by combined announcement returns and post-merger operating performance.

Keywords: Corporate Governance, Mergers, Entrenchment, Overvalued Equity, Overpayment

JEL Classification: G32, G34