Management control and takeover premiums

This study examines the relationship between takeover premiums and management control variables in both target and acquiring firms. Takeover premiums are often justified by growth opportunities and the creation of synergies. However, recent studies suggest that these premiums might result from overpayments, which diminish the wealth of the acquirer's shareholders. Here we examine the sources of takeover premiums in order to determine whether they are overpayments, underpayments or fair payments.

Using a management control scorecard, which aggregates the scores of twelve variables representing governance quality and ownership structure, the study examines a sample of 81 US companies involved in 42 M&A transactions between 2010-2013. The Lexis Nexis database was used to access company directories and regulatory filings (mainly 8-K forms filed with the SEC) to identify the transactions, together with the corresponding payment premiums. For each company, we collected data on their governance and ownership characteristics using Wharton Data Research Services. Dummy variables were used to quantify the qualitative variables collected, and their relationships with ownership premiums were estimated using ordinary least squares.

The estimation results indicate that acquirers paid significantly higher (than average) premiums when at least half of the directors sitting on target boards held multiple directorships. When at least half of the directors sitting on acquirer boards held multiple directorships, acquirers paid significantly lower premiums. In addition, when the acquirer's management is well-entrenched, and the target's management is not, the takeover premium is significantly smaller than the sample average. This might be explained by the acquirer's management having more authority to negotiate the deal premium and a lower perceived value for target firms whose management's authority is limited. When target management control is strong and acquirer management control is weak, and when both target and acquirer management control are either strong or weak, the premium paid is not significantly different from the average premium.

These results provide the first step towards an investment screening tool for companies involved in M&A transactions. By comparing expected premiums with the actual or offered premiums, overpayments, underpayments and fair payments can be distinguished from one another. Future research would benefit from a larger data set, which would allow the examination of, inter alia, size and industry effects, the form of payment, and transaction type. In addition, though extensive, the twelve explanatory variables used here as proxies for management control are not an exhaustive list. Other proxies can be identified and studied.