Much more on incentives next week Managerial attention Warren Buffett is a

Much more on incentives next week managerial

This preview shows page 32 - 40 out of 43 pages.

Much more on incentives next week Managerial attention Warren Buffett is a serial acquirer but somehow has committed not to pay much attention to his acquisitions – he lets his managers operate without much interference. Seems somewhat unique in this – very difficult to avoid the temptation to meddle 32
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33 Some arguments to be skeptical of “Mergers diversify shareholders’ portfolios” People often argue that a merger will reduce risk through diversification In well-functioning capital markets, however, shareholders can do this themselves i.e. if business A is pro-cyclical and business B is anti-cyclical, an investor could buy shares of both without them merging Financial diversification will generally be much less costly than a merger
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34 Some arguments to be skeptical of “I am good at identifying undervalued firms” In this case, the price they will pay will be less than their expected profits. But do we really think they have better information than all other potential investors? Overwhelming evidence from psychology, finance, etc. that managers tend to be overconfident in their own judgment.
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35 An argument that needs clarification “The merger will create $X in synergies” On its own, a vacuous claim Essentially saying the merger will increase revenues or lower costs … Always be sure to clarify what exactly the “synergies” are
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36 Managerial incentives for mergers Our discussion has been framed as: when do mergers increase shareholder value A different question: when do mergers make CEOs happy? Since corporate governance is generally weak, we would expect private incentives to play a role
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37 Managerial incentives for mergers Possible incentives: Like running larger companies Like to be on the cover of magazines Want to diversify away personal risk (legal limits on ability to hedge in financial markets) Want to ensure firm’s survival to protect own job / human capital Want to ensure growth so that subordinates can continue moving up the ladder
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38 Managerial incentives for mergers We would expect these incentives to play a large role in mergers... Where merging companies are unrelated Where target companies are growing fast Where managers have performed poorly in the past Morck, Shleifer and Vishny show that exactly these kinds of mergers tend to lead to adverse stock market reaction at announcement
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39 What does the empirical evidence show? Mergers on average create shareholder value (at least a little) All of the gains accrue to target firms (acquiring firms may actually lose out on average) This evidence comes mainly from event studies, but is supported by studies of profitability. Long-run stock market performance provides some contrary evidence.
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