Between 1990 and 2012, of the more than 6,000 acquisitions with publicly available data, shareholders received a median 36% premium over the pre-announcement price creating roughly $1.7 trillion in shareholder value. So as M&A activity picks back up many investors are looking for likely targets, but in addition to the financial details that drive such deals investors may need to ask if the CEO is looking forward to retirement.
“Controlling for CEO and firm characteristics and the 1997-99 merger wave, the implied probability that a firm receives a successful takeover bid is close to 4.4% per year for CEOs just below retirement age, but it increases to 5.8% for CEOs aged 64-66,” write Stanford professor Dirk Jenter and Dartmouth professor Katharina Lewellen. “This corresponds to a 32% increase in the odds of a sale, and the increase is statistically significant at the 1% level.”
(NB: the graph below only shows successful bids, though it isn’t clearly labeled)
M&A activity effect: Younger CEOs prefer to keep their jobs
It’s easy to understand why this might be true, CEOs are usually out of a job shortly after their company is acquired and in most cases they don’t become the CEO of another publicly owned company afterwards. That’s not to say they can’t find work, but most of the time it means their career has peaked and started to decline – unless of course they are already thinking about retiring.
But that doesn’t mean older CEOs are giving up value to leave on a high note. Jenter and Lewellen found that while successful bids were more likely under retirement-age CEOs, the premiums didn’t change. When they screened companies for good governance (regressing stock ownership by the CEO, by blockholders, and by directors; board size; board independence; and CEO-chairman duality) the acquisition rate of companies with retirement age CEOs stayed the same, while the rate for younger CEOs went up.
In other words, younger CEOs are more likely to put their career interests ahead of shareholders when it comes time to negotiate M&A.
Very high M&A activity shifts the effect to younger CEOs
But Jenter and Lewellen mention controlling for the Merger Wave between 1997 and 1999 because the peak shifted down to the 59 – 63 age group. They speculate that younger CEOs may have been responding to better incentives for leading companies through a successful acquisition, though it may have also simply been more comfortable to re-enter the job market when so many other execs were in similar positions.
With M&A deal activity once again on the rise, investors looking for an edge may want to look for CEOs a few years below the typical retirement age for the highest chance of a successful bid.