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Oct 10, 2010

M&A focus: The role of hormones

Young male CEOs take a more combative approach to deals, argue researchers

In William Cohan’s detailed account of the weekend when Lehman Brothers collapsed for Fortune magazine, he describes a scene where executives from a number of the US’ top banks are gathered at the New York Federal Reserve, discussing how the world will look if Lehman is allowed to go under. 

According to Cohan, the group assumed Merrill Lynch would be next to go and then ‘the assembled alpha males began talking about Merrill Lynch in front of Thain [John Thain, CEO of Merrill Lynch at the time], as if he weren’t there’. 

As we know, Merrill Lynch was saved in the end through a merger with Bank of America, which was arranged that same weekend, but things turned out very differently for Lehman. 

Much has been written about the events of that weekend, and focus often falls on the difficulty of getting the assembled bankers to work together. This is hardly surprising, given how competitive an individual you must be to rise to the peak of the banking world. Compromise is not a word that comes to mind when you think of Thain, or Lehman’s Dick Fuld. Getting a bunch of alpha males – as they are often referred to – to reach some kind of consensus for the common good was perhaps asking too much, given the testosterone levels. 

One group of researchers, from the Sauder School of Business at Canada’s University of British Columbia, feels testosterone is such an important consideration when it comes to deal making between public companies that it has carried out research on the topic. Using age as a proxy for CEO testosterone levels, the researchers – two men and one woman – studied M&A activity in the US among companies with male CEOs between 1997 and 2007 in the hope of finding some kind of correlation between age/testosterone level and deal strategy. 

They find that young (45 years or younger) male CEOs appear to be more combative than older ones, resulting in younger individuals being 4 percent more likely to be acquisitive. The younger sample is also less likely to reach a compromise following the initiation of a bid: they are 20 percent more likely to withdraw an offer.

In addition, the researchers say having a young male CEO at a target company influences the way the bidder will act. Specifically, they argue that the bidder is 2 percent more likely to make a tender offer – where the bidder circumvents the target board and makes the offer direct to shareholders – if the target CEO is young. The researchers say this is because the younger CEO threatens the dominance of the older one, so the bidder chooses a tender offer over reaching a negotiated deal that could undermine his position.

Overall, the conclusion is that the existence of high testosterone levels during an M&A scenario makes compromise less likely. ‘We argue that this combative nature is a result of testosterone levels that are higher in young males,’ says the paper. 

As the researchers point out, the results are in line with what you would expect. But what do shareholders make of youthful vigor? It seems, on the whole, they increasingly prefer a more mellow approach to corporate leadership. The latest annual study of CEOs (covering men and women) by Booz & Co reveals that bosses who left their jobs in 2009 were three years older when appointed – at an average age of 53.2 years – than CEOs who ended their tenures in 2000.