Extraordinary Acquirers Alfred Yawson The University of Adelaide Huizhong (Jodie) Zhang

Motivation The efficiency based theory proposed by Demsetz (1973) explains heterogeneous rates of return earned by firms within and across industries. Heterogeneous rates of return is possible because firms differ in their efficiency in exploiting profitable opportunities Firms demonstrate superiority in generating economic rents

Motivation Heterogeneous rates of return exist in corporate takeovers (Acquirers) Prior studies (both theoretical and empirical) have primarily focused on the negative tail of bidder return distribution (e.g., Moeller, Schlingemann and Stultz (2005); Masulis, Wang and Xie (2007); Harford, Humphery-Jenner and Powell (2012)) CEO hubris resulting in overpayment for the target (Roll (1986) The agency cost of free cash flow theory (Jensen, 1986) Managerial entrenchment resulting from poor corporate governance structures – anti-takeover provisions (Masulis, et al. (2007) Entrenched managers avoidance of private targets (Harford, et al. (2012) To our knowledge there is no evidence on acquirers who persistently create value in acquisitions

Key Research questions Are there any acquirers who persistently create value in acquisitions? If yes, what explains the existence of such acquirers? How do they generate persistent acquisition gains?

Key Research questions We address these questions focusing on acquirers who have completed at least three acquisitions in a three year window (Fuller, Netter & Stegemoller, 2002). We partition these acquirers into ‘extraordinary’ and ‘normal’ Extraordinary acquirers are those who generate positive CARs in all their transactions three years before the announcement date All other serial acquirers are classified as normal

Do extraordinary acquirers exist?

Why do extraordinary acquirers exist? “[In rare cases of finding value-enhancing targets] extraordinary managers exist who can achieve the difficult feat of identifying underperforming business, and apply extraordinary talent to unlock hidden value.” - Warren E. Buffett, 1998

Applying the efficiency based theory to takeovers Top Management Team Talent Efficiency in exploiting profitable acquisition opportunities Conceiving of valuable targets Financing deals via efficient deployment of existing resources Bargaining to appropriate takeover gains Imperfect immobility Specialized to the firm’s specific needs (Castanias and Helfat (1991) Relies upon the learning, cooperation and corporate activities of the past and therefore is path dependent (Dierickx and Cool (1989) Affected by interpersonal relations among executives and thus socially complex (Penrose 1959; Demsetz 1973) Superior top management team talent drives the existence of extraordinary acquirers

Predicting extraordinary acquirers Top Management Team Talent Team size   Team tenure The average number of years top team members have worked in the bidding firm (Hambrick, Cho et al. 1996; Chemmanur and Paeglis 2005) Tenure heterogeneity Average age The average age of top team members

Predicting extraordinary acquirers Control variables CEO dominance Powerful CEOs are likely to nullify other executives’ contributions and thus diminish any efficiency gains from a team (Haleblian and Finkelstein 1993). Calculated as salary plus bonus in the most recent fiscal year prior to the announcement date scaled by the average salary plus bonus of the other top management team members. Bidder Characteristics Corporate governance Bidder Size Deal Characteristics Hostile Multiple Bidders Aggregate M&A

Data US acquirers data sourced from SDC 1990 to 2011 The bidder must be a US publicly listed company with accounting data stored on Compustat and stock data on CRSP for 300 trading days prior to the announcement. The acquisition must be completed. The acquirer must own less than 50% of the target stock before the acquisition and achieve 100% after. The transaction must be at least 1% of the acquirer’s market capitalization 11 days before the announcement and also exceeds $1 million. The acquirer must have successfully completed three or more targets in a period of three years

Multivariate Analysis of Being Extraordinary Acquirers Probit Regression   Post-Heckman (1) (2) (3) (4) (5) (6) Team Size 0.068** (0.013) Average Tenure 0.016*** (0.000) Tenure Heterogeneity 0.264** (0.020) Average Age 0.014** (0.015) CEO Dominance -0.061** -0.059* -0.052 -0.053* 0.000 (0.034) (0.075) (0.231) (0.055) (0.263) (0.992) Classified Board -0.060 -0.083 -0.043 -0.073 -0.027 0.001 (0.371) (0.276) (0.672) (0.281) (0.795) (0.964) Inverse Mills Ratio 0.071 (0.421) 0.097** (0.037) 0.020** (0.037) 0.014** (0.043) 0.002* (0.095) 0.338*** (0.004) 0.068*** (0.006) 0.012 (0.208) 0.002 (0.218)

Maintaining Extraordinary Acquirer Status over Extended Periods 5 year 10 year 15 year (1) (2) (3) Team Size 0.017* 0.001 0.002 (0.066) (0.935) (0.810) Average Tenure 0.003** 0.002** (0.035) (0.020) (0.033) Tenure Heterogeneity 0.067*** 0.084*** 0.081*** (0.004) (0.000) Average Age 0.000 -0.001 (0.210) (0.787) (0.667) CEO Dominance -0.005 (0.866) (0.933) (0.427) Classified Board -0.002 -0.034* -0.017 (0.937) (0.059) (0.341) Inverse Mills Ratio 0.094 0.076 0.082 (0.262) (0.312) (0.263)

Probit Results of Changes in Acquirer Status Change in Team Size Change in Average Tenure Change in Tenure Heterogeneity Change in Average Age Change in CEO Dominance Classified Board -0.305 (0.420) Ln(Bidder Size) 0.028 (0.824) Ln(Aggr. M&A) 0.714 (0.147) N 91 66 (1) 0.804*** (0.000) 0.435*** (0.008) 2.601** (0.017) -0.077 (0.267) 0.096 (0.742) (2) 0.901*** (0.000) 0.515*** (0.005) 3.104** (0.014) -0.090 (0.156) 0.024 (0.941)

How do extraordinary acquirers create value In the M&A context, value creation can be reflected in: Target selection Payment methods Negotiation skills Given that a firm is classified as an extraordinary acquirer, will the subsequent deal reflect a choice that is value enhancing to shareholders?

Post-Heckman Results for Bidding Strategies Target selection   Medium of exchange Interactions Public Private Sub. All Cash All Stock Mixture Pub*Cash Pub*Stock (1) (2) (3) (4) (5) (6) (7) (8) Extraordinary Dummyt-1 -0.059 -0.078 0.138*** 0.114** -0.084** -0.030 -0.046 0.003 (0.211) (0.147) (0.006) (0.025) (0.021) (0.578) (0.146) (0.917) Ln(Bidder Size) 0.087*** -0.098*** 0.012 0.016 0.018** -0.034*** 0.030*** (0.000) (0.251) (0.131) (0.020) Tobin's Q 0.007 0.041*** -0.048*** -0.059*** 0.055*** 0.004 0.017** -0.015** (0.544) (0.001) (0.807) (0.038) (0.029) FCF -0.047 -0.320* 0.364** 0.389** -0.309** -0.080 -0.127 -0.011 (0.761) (0.067) (0.040) (0.027) (0.023) (0.717) (0.283) (0.912) Leverage 0.030 -0.116 0.079 -0.021 -0.015 0.036 0.118* -0.123** (0.764) (0.311) (0.471) (0.848) (0.847) (0.089) (0.046) Classified Board 0.035 -0.005 -0.001 0.041 -0.040 -0.012 (0.228) (0.869) (0.369) (0.974) (0.103) (0.319) (0.167) (0.489) IMR 0.162 0.182 -0.336* 0.315 0.328** -0.643*** 0.286** 0.131 (0.361) (0.367) (0.093) (0.115) (0.031) (0.008) (0.030) (0.232)

OLS Regression Results for Synergies and BSOS (1) (2) (3) (4) (5) (6) (7) (8) Extraordinary Dummyt-1 191.495*** 153.863 109.870 43.958 (0.007) (0.567) (0.141) (0.873) (0.000) (0.001) (0.002) Bidder Characteristics No Yes Deal Characteristics 1.435*** 1.903*** 1.280*** 1.951***

Conclusion We depart from the traditional focus on value destruction by acquiring firms and instead examine acquirers who consistently earn positive takeover announcement CAR We show that extraordinary acquirers exist We find that the achievement and maintenance of an extraordinary acquirer status is driven by top management team talent. Normal acquirers can achieve extraordinary status by improving their top management team talent.

Conclusion Extraordinary acquirers create value by Selecting subsidiary targets Using cash and avoiding stocks to finance acquisitions Appropriating a larger proportion of synergy gains in public bids Overall, our results suggest superior top management team talent is essential in creating persistent value in acquisitions