Retiring Managers and Merger Performance

Research suggests that managers, personally, are responsible for nearly one third to one half of all merger failures (Ashton-James et al., 2012). And there are a number of human explanations for why the manager might be personally culpable.
Professor Roll, the Chair of Applied Finance at the University of California Los Angeles, for example, suggests that top managers — even those who are genuinely interested in creating shareholder value — tend to overestimate their abilities, and their ability to impact deal performance. Over-confident, ‘hubristic’ managers, he suggests, are more likely to over-pay for a target, to ignore the precautionary suggestions of others, and are more likely to embark on risky acquisitions. Over confidence, on behalf of the manager may, in other words, explain performance. 
Proponents of the ‘managerial theories of the firm’ are less forgiving of the manager. Entrenchment theory, for example, suggests that managers make acquisitions to secure their long-term position in the firm, and empire-building theory suggests that managers use mergers to grow the firm beyond its optimal size for bragging rights. Such deals, it is suggested, are designed not to create shareholder value, but are instigated by managers, for managers. Research shows, in fact, that as many as 26% of all acquisitions fall into the category of ‘managerial’ by motive (Seth et al., 2000).
The existing discussion, however, is a static one: managerial over-confidence, and self-interestedness is assumed to be constant over the life of the manager. And it is assumed that young managers — with careers ahead of them — behave in the same way as older, soon-to be retiring managers, with little to lose. But is this really so? 
An extensive body of research suggests that age decreases the managers appetite for risk (Bernartzi & Thaler, 1999;Gibbons and Murphy, 1992). And a study by Gibbson et al. (1992) — which considers how the age of the manager impacted the scale of their R&D and advertisement investment — shows that managerial  investment behaviour also varies significantly over the life of the manager. In the context of mergers, little is known about managerial age impacts the acquisition decision. And nothing, to the best of our knowledge, is known about how the approach of retirement — along with the change in incentives implied by retiring from the industry — impacts the acquisition decision, and the indeed deal performance. 
To understand the effect of retirement, in particular, on the behaviour of the manager, and the performance of the deal, we built a sample of 11,039 deals over a 23 year period. We then identified 2,111 retiring managers, and 777 acquisitions, which were initiated by these managers, within 12 months of their retirement date*. 
Our results were as dramatic as they were unexpected. First — and contrary to our expectation that managers, with one eye on retirement, would be unlikely to engage in large scale acquisitions — we find that 36% of the retiring managers were willing to engage in a large scale acquisition, with 12 months or less left on the job. Second — and contrary to our expectation that older managers would be less likely to make risky acquisitions and, consequently, more likely to make be involved in value-creating deals — we find that retiring managers were significantly more likely to be involved in risky, value-destroying acquisitions, than their younger peers. All else equal, and using stock market measures to comment on performance, we found that a deal instigated by a retiring manager was 78.4 and 116.8 points worse than a similar deal, instigated by a manager with no immediate intention to retire. 
But how can we explain this? We suspect that the story is one of incentives. Younger managers, in the midst of their career, have their reputation, their position, and their future employability to worry about. But older managers, we speculate, have little to lose. So, why not leave with a bang? And why not take one last shot at creating a new, bigger, better, company. If it works, then the outgoing manager will be a hero: he will be the man who build the company, with a statue in the lobby. If it doesn’t, well, then it’s somebody else’s problem: the retiring manager has a date with the golf course. 
The research, of course, has a number of corporate governance implications. Chief amongst these is the suggestion that managers, facing retirement, should have their freedom to make acquisitions in the final years of their employment curtailed. 
* Many thank to Justina Klara — a Masters student at the University of Groningen — who assisted in the collection of this data for Masters thesis project. 
About the Author: 
Dr. Killian McCarthy is assistant professor bij de University of Groningen. Hij behaalde zijn PhD in economics of corporate strategy in 2011, voor zijn onderzoek over overnameprestaties. In dit onderzoek evalueerde Killian de prestatie van 35,000+ deals in Europe, Noord-Amerika en Azië in de periode 1990-2010. 
  • Ashton-James, C. E., McCarthy, K. J. & Dranca, A. (2011). Managerial power and value destruction in mergers and acquisitions. In McCarthy, K. J., & Dolfsma, W. (Eds.). The Nature of the New Firm, London: Edward Elgar. 
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  • Gibbons R, Murphy K. J. (1992). Optimal incentive contracts I the presence of career concerns: theory and evidence. Journal of Political Economy. Vol. 100: 468-505.
  • Gibson, J.L., J.M. Ivancevich and J.H Donnely Jr, (1991), Organisations, 7th Editions, Irwin, Homeword, IL
  • Seth, A., (1990), value creation in acquisitions: A reexamination of performance issues, Strategic Management Journal, 8: 377-386
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