1. Extraordinary Acquirers
Alfred Yawson
The University of Adelaide
Huizhong (Jodie) Zhang

2. Motivation
The efficiency based theory proposed by Demsetz (1973) explains heterogeneous rates of return earned by firms within and across industries.
Heterogeneous rates of return is possible because firms differ in their efficiency in exploiting profitable opportunities
Firms demonstrate superiority in generating economic rents

3. Motivation
Heterogeneous rates of return exist in corporate takeovers (Acquirers)
Prior studies (both theoretical and empirical) have primarily focused on the negative tail of bidder return distribution (e.g., Moeller, Schlingemann and Stultz (2005); Masulis, Wang and Xie (2007); Harford, Humphery-Jenner and Powell (2012))
CEO hubris resulting in overpayment for the target (Roll (1986)
The agency cost of free cash flow theory (Jensen, 1986)
Managerial entrenchment resulting from poor corporate governance structures – anti-takeover provisions (Masulis, et al. (2007)
Entrenched managers avoidance of private targets (Harford, et al. (2012)
To our knowledge there is no evidence on acquirers who persistently create value in acquisitions

4. Key Research questions
Are there any acquirers who persistently create value in acquisitions?
If yes, what explains the existence of such acquirers?
How do they generate persistent acquisition gains?

5. Key Research questions
We address these questions focusing on acquirers who have completed at least three acquisitions in a three year window (Fuller, Netter & Stegemoller, 2002).
We partition these acquirers into ‘extraordinary’ and ‘normal’
Extraordinary acquirers are those who generate positive CARs in all their transactions three years before the announcement date
All other serial acquirers are classified as normal

6. Do extraordinary acquirers exist?

7. Why do extraordinary acquirers exist?
“[In rare cases of finding value-enhancing targets] extraordinary managers exist who can achieve the difficult feat of identifying underperforming business, and apply extraordinary talent to unlock hidden value.”
- Warren E. Buffett, 1998

8. Applying the efficiency based theory to takeovers
Top Management Team Talent
Efficiency in exploiting profitable acquisition opportunities
Conceiving of valuable targets
Financing deals via efficient deployment of existing resources
Bargaining to appropriate takeover gains
Imperfect immobility
Specialized to the firm’s specific needs (Castanias and Helfat (1991)
Relies upon the learning, cooperation and corporate activities of the past and therefore is path dependent (Dierickx and Cool (1989)
Affected by interpersonal relations among executives and thus socially complex (Penrose 1959; Demsetz 1973)
Superior top management team talent drives the existence of extraordinary acquirers

9. Predicting extraordinary acquirers
Top Management Team Talent
Team size
Team tenure
The average number of years top team members have worked in the bidding firm (Hambrick, Cho et al. 1996; Chemmanur and Paeglis 2005)
Tenure heterogeneity
Average age
The average age of top team members

10. Predicting extraordinary acquirers
Control variables
CEO dominance
Powerful CEOs are likely to nullify other executives’ contributions and thus diminish any efficiency gains from a team (Haleblian and Finkelstein 1993).
Calculated as salary plus bonus in the most recent fiscal year prior to the announcement date scaled by the average salary plus bonus of the other top management team members.
Bidder Characteristics
Corporate governance
Bidder Size
Deal Characteristics
Hostile
Multiple Bidders
Aggregate M&A

11. Data US acquirers data sourced from SDC 1990 to 2011
The bidder must be a US publicly listed company with accounting data stored on Compustat and stock data on CRSP for 300 trading days prior to the announcement.
The acquisition must be completed.
The acquirer must own less than 50% of the target stock before the acquisition and achieve 100% after.
The transaction must be at least 1% of the acquirer’s market capitalization 11 days before the announcement and also exceeds $1 million.
The acquirer must have successfully completed three or more targets in a period of three years

12. Multivariate Analysis of Being Extraordinary Acquirers
Probit Regression
Post-Heckman
(1)
(2)
(3)
(4)
(5)
(6)
Team Size
0.068**
(0.013)
Average Tenure
0.016***
(0.000)
Tenure Heterogeneity
0.264**
(0.020)
Average Age
0.014**
(0.015)
CEO Dominance
-0.061**
-0.059*
-0.052
-0.053*
0.000
(0.034)
(0.075)
(0.231)
(0.055)
(0.263)
(0.992)
Classified Board
-0.060
-0.083
-0.043
-0.073
-0.027
0.001
(0.371)
(0.276)
(0.672)
(0.281)
(0.795)
(0.964)
Inverse Mills Ratio
0.071
(0.421)
0.097**
(0.037)
0.020**
(0.037)
0.014**
(0.043)
0.002*
(0.095)
0.338***
(0.004)
0.068***
(0.006)
0.012
(0.208)
0.002
(0.218)

13. Maintaining Extraordinary Acquirer Status over Extended Periods
5 year
10 year
15 year
(1)
(2)
(3)
Team Size
0.017*
0.001
0.002
(0.066)
(0.935)
(0.810)
Average Tenure
0.003**
0.002**
(0.035)
(0.020)
(0.033)
Tenure Heterogeneity
0.067***
0.084***
0.081***
(0.004)
(0.000)
Average Age
0.000
-0.001
(0.210)
(0.787)
(0.667)
CEO Dominance
-0.005
(0.866)
(0.933)
(0.427)
Classified Board
-0.002
-0.034*
-0.017
(0.937)
(0.059)
(0.341)
Inverse Mills Ratio
0.094
0.076
0.082
(0.262)
(0.312)
(0.263)

14. Probit Results of Changes in Acquirer Status
Change in Team Size
Change in Average Tenure
Change in Tenure Heterogeneity
Change in Average Age
Change in CEO Dominance
Classified Board
-0.305
(0.420)
Ln(Bidder Size)
0.028
(0.824)
Ln(Aggr. M&A)
0.714
(0.147) N 91 66
(1)
0.804***
(0.000)
0.435***
(0.008)
2.601**
(0.017)
-0.077
(0.267)
0.096
(0.742)
(2)
0.901***
(0.000)
0.515***
(0.005)
3.104**
(0.014)
-0.090
(0.156)
0.024
(0.941)

15. How do extraordinary acquirers create value
In the M&A context, value creation can be reflected in:
Target selection
Payment methods
Negotiation skills
Given that a firm is classified as an extraordinary acquirer, will the subsequent deal reflect a choice that is value enhancing to shareholders?

16. Post-Heckman Results for Bidding Strategies
Target selection
Medium of exchange
Interactions
Public
Private
Sub.
All Cash
All Stock
Mixture
Pub*Cash
Pub*Stock
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Extraordinary Dummyt-1
-0.059
-0.078
0.138***
0.114**
-0.084**
-0.030
-0.046
0.003
(0.211)
(0.147)
(0.006)
(0.025)
(0.021)
(0.578)
(0.146)
(0.917)
Ln(Bidder Size)
0.087***
-0.098***
0.012
0.016
0.018**
-0.034***
0.030***
(0.000)
(0.251)
(0.131)
(0.020)
Tobin's Q
0.007
0.041***
-0.048***
-0.059***
0.055***
0.004
0.017**
-0.015**
(0.544)
(0.001)
(0.807)
(0.038)
(0.029)
FCF
-0.047
-0.320*
0.364**
0.389**
-0.309**
-0.080
-0.127
-0.011
(0.761)
(0.067)
(0.040)
(0.027)
(0.023)
(0.717)
(0.283)
(0.912)
Leverage
0.030
-0.116
0.079
-0.021
-0.015
0.036
0.118*
-0.123**
(0.764)
(0.311)
(0.471)
(0.848)
(0.847)
(0.089)
(0.046)
Classified Board
0.035
-0.005
-0.001
0.041
-0.040
-0.012
(0.228)
(0.869)
(0.369)
(0.974)
(0.103)
(0.319)
(0.167)
(0.489)
IMR
0.162
0.182
-0.336*
0.315
0.328**
-0.643***
0.286**
0.131
(0.361)
(0.367)
(0.093)
(0.115)
(0.031)
(0.008)
(0.030)
(0.232)

17. OLS Regression Results for Synergies and BSOS
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Extraordinary Dummyt-1
***
43.958
(0.007)
(0.567)
(0.141)
(0.873)
(0.000)
(0.001)
(0.002)
Bidder Characteristics No
Yes
Deal Characteristics
1.435*** *** *** ***

18. Conclusion
We depart from the traditional focus on value destruction by acquiring firms and instead examine acquirers who consistently earn positive takeover announcement CAR
We show that extraordinary acquirers exist
We find that the achievement and maintenance of an extraordinary acquirer status is driven by top management team talent.
Normal acquirers can achieve extraordinary status by improving their top management team talent.

19. Conclusion Extraordinary acquirers create value by
Selecting subsidiary targets
Using cash and avoiding stocks to finance acquisitions
Appropriating a larger proportion of synergy gains in public bids
Overall, our results suggest superior top management team talent is essential in creating persistent value in acquisitions