The Academy of Management Journal just published a new study conducted by academics from Michigan State University, University of Georgia and the University of Michigan-Dearborn. The study is quite a mouthful – “Do They Walk the Talk or Just Talk the Talk? Gauging Acquiring CEO and Director Confidence in the Value-Creation Potential of Announced Acquisitions.” HBR covered the study in a recent article.

The research involved analyzing 2000 public firms over a 12-year period.

 Conclusions worth noting
  • CEOs are 28% more likely to exercise stock options and 23.5% more likely to sell company stock in quarters following acquisition announcements than after quarters without such an announcement.
  • A sharply positive market response over the six-day period surrounding announcements increases the likelihood of CEO option exercises by 17.4% and of CEO stock sales by 15%.
  • Boards are 16.7% more likely to issue CEO new stock options following acquisitions than they would otherwise.
Observations Noted By the Authors
  1. Bursts the myth that acquisitions are ego driven deals where CEOs are over optimistic about their ability to achieve a return? Maybe, certainly if that was true, would we expect an increased probability of stock sales?
  2. Another assumption in the marketplace is that acquisitions are driven by personal greed. CEOs see the chance of creating a much larger business to manage and that usually justifies a larger salary. But then why would you sell your stock at a time when your package might increase?
My take
  1. Most acquirers are weak on acquisition process. Their post acquisition planning and integration is just not fit for purpose
  2. Most CEOs have done few many acquisitions but know strategically it makes sense. The selling of stock is a hedging bet to secure some wealth, before their lack of execution experience is revealed. Boards seem to issue more stock anyway according to the study. (17% more likely to do so after a deal.)
  3. Perhaps shareholders should demand that CEOs are banned from selling stock for 12 months after a major deal as a condition of getting their approval.
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