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Jun 30, 2010

M&A focus: new brooms clean up

Making a deal quickly pays for new CEOs, finds study

Marry in haste, repent at leisure’ is a phrase often used to deride quickly completed M&A deals. Journalists have pulled it out more than a few times over the last couple of years as companies rushed into deals that were ‘transformational’ in the way that swallowing a live grenade is likely to have a transformational effect on your abdomen.

It’s interesting, therefore, to see research that finds new CEOs who start making deals straight away tend to help improve returns. A recent study by the Mergers & Acquisitions Research Centre at London’s Cass Business School looks at CEOs who conduct deals – both acquisitions and divestments – in their first year in office.

The results make interesting reading, particularly as most of the research on deals concludes that M&A activity usually destroys value for the acquirer. The team at Cass finds that chief executives who ‘perform a major deal during their first year in office outperform their peers in the long run.’

This helps to explain the actions of Tidjane Thiam, who became CEO of Prudential on October 1, 2009 (too late to be included in this study). Thiam’s plan – which in the end was blocked by shareholders – was to quickly transform the business by purchasing AIA, the Asian arm of troubled US insurer AIG.

Other examples include the CEO double-act of Bill McDermott and Jim Snabe at SAP, who have moved quickly to launch a $5.8 bn takeover of Sybase, a US rival, after taking over at SAP in February this year.

‘Our analysis of the most effective deal strategies in terms of market performance, post-succession, provides some interesting findings,’ the report states. ‘Regression analyses show that CEOs who are active and announce a major deal during their first year in the corner office will be rewarded by the market in the long run with share price returns better than the index. Chief executives who engage in activity of major deals to change the course or strategy of the company are successful.’

Being too ambitious is dangerous, however, because performing more than one deal during the first year ‘lowers the firm’s returns as integration or separation from the previous deal suffers’. The report also notes that most CEOs do not make a major deal during their first year in charge of a company.

We know from previous research that deals tend to destroy value for the acquirer. Only last month, this column reported on a note from Citigroup, which concluded that M&A is driven by CEOs’ greed and egotism, coupled with a fear of being acquired by competitors if they don’t make the first move. It can’t be put down to producing shareholder value because – generally – it doesn’t, the author concludes.

The difference in Cass’ report is its focus on new CEOs. If a new CEO has come in and wants to make changes quickly, it’s probably because the company is already troubled. Therefore, a deal is more likely to add value as the company is more likely to be performing badly in terms of returns. Given all the bad press deal making gets from the researchers and academics, perhaps this report will find mention in CEOs’ future M&A presentations when they take them to shareholders.