Sources of Value Destruction in Acquisitions by Entrenched Managers

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

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Jarrad Harford, University of Washington Mark Humphery-Jenner, University of New South Wales – Australian School of Business; Financial Research Network (FIRN) Ronan Powell, University of New South Wales (UNSW) – School of Banking and Finance; Financial Research Network (FIRN)

Journal of Financial Economics (JFE), Vol. 106, No. 2, 2012

Sources of Value Destruction in Acquisitions by Entrenched Managers