Wednesday, December 11, 2013

CEOs: Building Empires and Selling Shares at the Same Time?

Many CEOs like doing deals.  Mergers and acquisitions happen for many reasons.   Typically, CEOs argue that synergies exist between the acquiring firm and the target that is being purchased.  However, we sometimes wonder whether CEOs are just as interested in empire building as they are in creating long term shareholder value.   A splashy merger means that their faces end up on the cover of leading periodicals, and in many cases, their compensation packages rise as they come to run larger enterprises.   Do these deals actually create value?  In many cases, they do not.   

Interestingly, Tulane Professor Cynthia Devers and her colleagues have discovered something interesting about the behavior of CEOs involved in acquisitions.  They examined more than 2,000 companies over a 12 year period. They found that acquiring company CEOs are 28% more likely to exercise stock options and 24% more likely to sell shares within three months following acquisition announcements than they are during other periods in which no acquisitions are taking place.  

Hmm... why would these CEOs be selling shares if they were so confident of the synergies that can be achieved as a result of these deals?  Are CEOs telling Wall Street that the whole is worth more than the sum of the parts, while at the same time, they are selling shares because they know that it will be hard to generate enough synergies to justify the takeover premium that has been paid? 
The study of more than 2,000 companies over a period of 12 years finds that CEOs are 28 percent more likely to exercise stock options and 24 percent more likely to sell company stock within three months following acquisition announcements than they are at times in which no acquisitions are announced. - See more at: http://freemanblog.freeman.tulane.edu/freemannews/index.php/tag/cynthia-devers/#sthash.M2FlaTCO.dpuf

The study of more than 2,000 companies over a period of 12 years finds that CEOs are 28 percent more likely to exercise stock options and 24 percent more likely to sell company stock within three months following acquisition announcements than they are at times in which no acquisitions are announced. - See more at: http://freemanblog.freeman.tulane.edu/freemannews/index.php/tag/cynthia-devers/#sthash.M2FlaTCO.dpuf
The study of more than 2,000 companies over a period of 12 years finds that CEOs are 28 percent more likely to exercise stock options and 24 percent more likely to sell company stock within three months following acquisition announcements than they are at times in which no acquisitions are announced.
“Although executives exercise options and sell shares for all sorts of reasons, it does seem odd that they’re especially likely to do so in the aftermath of acquisitions that they presumably engineer for the future good of the company,” says Devers, an associate professor of management at the Freeman School, who carried out the research with Gerry McNamara of Michigan State University, Michele E. Yoder of the University of Wisconsin, Madison and Jerayr Haleblian of the University of California, Riverside.
In the words of the study, “Our findings show that in the quarters following acquisition announcements, CEOs reduced their equity-based holdings by cashing out stock options and selling firm stock…presumably to reduce the exposure of their equity-based holdings to potential firm stock price decreases. Thus, their behavior is inconsistent with the idea that CEOs are confident that their acquisitions will generate substantial long-term shareholder value.”
- See more at: http://freemanblog.freeman.tulane.edu/freemannews/index.php/tag/cynthia-devers/#sthash.M2FlaTCO.dpuf

The study of more than 2,000 companies over a period of 12 years finds that CEOs are 28 percent more likely to exercise stock options and 24 percent more likely to sell company stock within three months following acquisition announcements than they are at times in which no acquisitions are announced.
“Although executives exercise options and sell shares for all sorts of reasons, it does seem odd that they’re especially likely to do so in the aftermath of acquisitions that they presumably engineer for the future good of the company,” says Devers, an associate professor of management at the Freeman School, who carried out the research with Gerry McNamara of Michigan State University, Michele E. Yoder of the University of Wisconsin, Madison and Jerayr Haleblian of the University of California, Riverside.
In the words of the study, “Our findings show that in the quarters following acquisition announcements, CEOs reduced their equity-based holdings by cashing out stock options and selling firm stock…presumably to reduce the exposure of their equity-based holdings to potential firm stock price decreases. Thus, their behavior is inconsistent with the idea that CEOs are confident that their acquisitions will generate substantial long-term shareholder value.”
- See more at: http://freemanblog.freeman.tulane.edu/freemannews/index.php/tag/cynthia-devers/#sthash.M2FlaTCO.dpuf
The study of more than 2,000 companies over a period of 12 years finds that CEOs are 28 percent more likely to exercise stock options and 24 percent more likely to sell company stock within three months following acquisition announcements than they are at times in which no acquisitions are announced.
“Although executives exercise options and sell shares for all sorts of reasons, it does seem odd that they’re especially likely to do so in the aftermath of acquisitions that they presumably engineer for the future good of the company,” says Devers, an associate professor of management at the Freeman School, who carried out the research with Gerry McNamara of Michigan State University, Michele E. Yoder of the University of Wisconsin, Madison and Jerayr Haleblian of the University of California, Riverside.
In the words of the study, “Our findings show that in the quarters following acquisition announcements, CEOs reduced their equity-based holdings by cashing out stock options and selling firm stock…presumably to reduce the exposure of their equity-based holdings to potential firm stock price decreases. Thus, their behavior is inconsistent with the idea that CEOs are confident that their acquisitions will generate substantial long-term shareholder value.”
- See more at: http://freemanblog.freeman.tulane.edu/freemannews/index.php/tag/cynthia-devers/#sthash.M2FlaTCO.dpuf

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