You Can Buy That Hot Social Networking Company But You'll Never Be Able To Capture Its Magic

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One of the more fertile areas of academic finance is explaining why M&A is so bad - mergers seem to be on average value destructive, so why do they keep happening? Are CEOs just stupid? Are bankers just evil and persuasive? Here's one answer that may be worth considering, which is that it looks like a good idea to acquire a successful company run by a talented and dedicated founder-CEO, but then things go pear-shaped because that founder-CEO either (1) departs, voluntarily or otherwise, with his giant bags of loot, or (2) suddenly loses interest in running his or her company when it's owned by someone else and that someone else is now the founder-CEO's boss:

Bidder gains are lower for acquisitions that involve targets with a founder CEO than for acquisitions of targets without a founder. The difference in bidder gains between takeovers of targets with founder CEOs and those without a founder is statistically significant, economically material, and robust to several model specifications that include a wide variety of deal- and firm-level control variables, like form of payment, competition, relative size, as well as some characteristics of the target CEO, such as his cash flow and voting stakes, age, and tenure.

That's from this paper by Nandu J. Nagarajan, Frederik P. Schlingemann, Marieke van der Poel and Mehmet F. Yalin. It doesn't clear up the whole mystery - non-founder mergers have also destroyed some value here and there, though I guess statistically less so - but I found it kind of fun. It's also pretty intuitive: if you built a firm from the ground up, you are probably better at making it do the thing that it is good at than anyone else is. And if you took that firm public (the study looks only at public targets - Instagram or whatever doesn't count), then you are probably pretty used to calling your own shots, so you might chafe under more senior management. And your chafing apparently renders you worthless (or at least zero-VORP); as the authors say, "we find no evidence of a difference in the relation between the value of the target firm’s founder human capital and bidder gains on the basis of whether the CEO is retained or not by the bidder after the acquisition."

Does this matter? I dunno, would you like to bet on it affecting the M&A market? I know which side of that bet I want. (Incidentally, a fun stat in the paper is that founder-run targets are 2.5x more likely than other companies to be bought by founder-run bidders, suggesting that Mark Zuckerberg is likely to continue negotiating one-offs with founder-run targets, and also maybe suggesting that M&A is influenced more by personal history and style than it is by, um, academic research.)

More broadly, though, lots of people like to fret about whether the IPO market is less welcoming to new companies than it should be, because of regulation or scariness of markets or Facebook or what have you. In the absence of an IPO exit, of course, mergers are the other alternative - and this paper perhaps suggests that that result is value destructive.

For another thing, I was really tickled by this bit from The Times's big thing on executive pay this weekend:

David E. Simon, the top executive at the Simon Property Group, was the second-highest paid C.E.O. last year, with $137 million. He joined the exclusive nine-figure niche occupied by Timothy D. Cook, who succeeded Steve Jobs at Apple. Mr. Cook received a package valued at $378 million. ... The Simon Property Group said the bonus offered to Mr. Simon “is intended to ensure that one of America’s best C.E.O.’s will lead the company until at least 2019, when Mr. Simon will be 58 years of age, rather than pursuing other employment opportunities.”

Because ... he will ... he'll go to Vornado? I mean ... his name is on the door? At Simon? Is retention that big of an issue? But the name on the door is an outlier; if you look at the Times's list of top paid CEOs, few are founders. In the top 10, I lazily count only Larry Ellison as the founder of his company. (David Simon isn't - the company is his dad's - and not to dispute the "America's best CEO" characterization in this particular case but you may not be surprised to learn that in general scion-CEOs are less value-additive than founder-CEOs.)

That's what you'd expect, mostly: the best-paid CEOs should be at big established companies, and big established companies tend to have been established in the olden days though that's not particularly evident from the Times's list unless the olden days were the 1970s, which I guess they were. And of course the more you pay a CEO the more motivated he will be to be awesome I guess? Except that remember all those founder-CEOs who, even though they were kept on to run their old companies, suddenly lost their mojo after the acquisition. Some of that mojo loss is surely caused by the novel experience of having a boss - but you could guess that the piles of new-found merger loot have something to do with it too. Too much money can be as de-motivating as too little.

Bidder Hubris and Founder Targets [Harvard Law thingy, SSRN]
A month later, fallout from Facebook IPO persists [USA Today]

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