September 12, 2019
M&A Announcements: Unrelated Good News May Signal a Bad Deal
This HBR article reviews recent research finding that companies that accompany their announcements of M&A transactions with other items of “good news” may not have a lot of confidence in their deal. Why? Here’s an excerpt:
In quarters following acquisitions, CEOs in the U.S. are 28% more likely to exercise options and 23.5% more likely to sell stock than they are in quarters not following acquisitions. This behavior implies that CEOs have low confidence in the value creation of their deals, and that the motivation for them may stem more from private interests or external pressures, than attempts to enhance shareholder wealth.
We wanted to ascertain CEO confidence in an acquisition’s value earlier—when the firm announces it. Acquisitions are strategic events in which the firm learns a wealth of non-public information about the target and the combined firm’s prospects, leading to a significant information asymmetry between managers and market investors. An indicator of low CEO confidence would offer investors an early clue about potential challenges with the deal that the firm anticipates.
We decided to look at firms’ communications around the time of an acquisition announcement, as this is one avenue for CEOs to manage impressions of the firm and its strategy. Specifically, we examined instances of “impression offsetting,” an impression management tactic in which firms issue unrelated positive news alongside strategic announcements, particularly those in which prospects for shareholder wealth creation are less certain. The general idea is to distract markets with good news. Prior research has shown that firms anticipate negative market reactions to acquisition announcements and successfully use impression offsetting as a way to reduce those negative responses.
The study found that the CEO of a company that bombarded the market with unrelated good news around the time of the deal announcement exercised 6.7% more options (on average, $220,000) in the next quarter than a CEO whose firm didn’t – which suggests that the release of unrelated good news may signal that a CEO has low confidence in the deal.
– John Jenkins