August 17, 2017
M&A Value Creation: Time to Rethink the “Winner’s Curse”?
When I taught law school, I’d always spend some time discussing the “winner’s curse” – the idea that because of competition among bidders for deals, most mergers didn’t create much value for the buyer’s shareholders. This disparity in outcomes between buyers & sellers has held true for a long time, and the existence of a winner’s curse in M&A has become conventional wisdom.
Now it turns out that we may need to rethink that conventional wisdom. This recent blog from Prof. Ann Lipton flags a new study that suggests that in recent years, the winner’s curse seems to have disappeared – at least at the high end of the food chain. Here’s the abstract:
M&A deals create more value for acquiring firm shareholders post-2009 than ever before. Public acquisitions fuel positive and statistically significant abnormal returns for acquirers while stock-for-stock deals no longer destroy value. Mega deals, priced at least $500 mil, typically associated with more pronounced agency problems, investor scrutiny and media attention, seem to be driving the documented upturn.
Acquiring shareholders now gain $62 mil around the announcement of such deals; a $325 mil gain improvement compared to 1990–2009. The corresponding synergistic gains have also catapulted to more than $542 mil pointing to overall value creation from M&As on a large scale. Our results are robust to different measures and controls and appear to be linked with profound improvements in the quality of corporate governance among acquiring firms in the aftermath of the 2008 financial crisis.
The authors attribute this gain to improved corporate governance, but Prof. Lipton speculates that there may be more to it than that:
Whatever value target shareholders receive is necessarily a function of the governing law – including, as the Delaware Supreme Court says, Revlon, Unocal, and the entire fairness doctrine. But with new cases like Corwin and Kahn, those are rapidly going the way of the dodo. (See, e.g., J. Travis Laster, Changing Attitudes: The Stark Results Of Thirty Years Of Evolution In Delaware M&A Litigation; Steven Davidoff Solomon & Randall Thomas, The Rise and Fall of Delaware’s Takeover Standards). It may once have been true that acquirers overpaid for targets, but it’s dangerous to change the legal landscape and expect the market to remain the same.
– John Jenkins