The Role of Internal Teams During the M&A Process

Nihat Aktas / Burcin Yurtoglu - July 19, 2021

Tips for practitioners

The economic importance of mergers and acquisitions (M&As) has spurred extensive research into the drivers of takeoveractivity and associated gains. Despite a large amount of literature, we know little about the drivers and wealth effects of M&As. In the meantime, scholars have recognized that firm-specific M&A practices account for a substantial portion of acquirer returns. Despite the overall importance of such internal factors in driving the takeover market, the components remained largely unexplored, in part due to the lack of data. The new study fills this gap by providing the first direct insights into the prevalence and structure of internal teams designed to cover the firms’ M&A activity.

Survey on 65 of the largest firms from the DACH region

The method with which firms implement the takeover process by surveying the largest firms in Austria, Germany, and Switzerland was analyzed. Responses from 65 firms indicate that internal M&A teams play an active role in shaping their acquisition activities. Empirical analysis confirms that differences in M&A team practices are associated with acquisition returns, and that team characteristics correlate with these practices across different stages of the M&A process. Overall, internal teams create value in the deal initiation and post-merger phases. In contrast, no evidence supports that the involvement of external advisors is associated with better returns.

Stage of the M&A process, team characteristics, and performance

At deal initiation, the respondents overwhelmingly cite economic rationales to motivate takeovers, but some also stress behavioral reasons such as market timing. M&As by firms emphasizing economic rationales are associated with higher returns while those pursuing behavioral rationales are associated with lower returns. Firms also report being proactive in target selection. For any given completed transaction, the average respondent screens 18 potential targets. More selective acquirers achieve, on average, 0.7% higher announcement returns. Surprisingly, a team’s financial experience is associated less with screening and more with a higher likelihood of pursuing deals for behavioral reason. Coupled with the evidence that these teams also achieve lower returns, the results suggest overconfidence associated with financial experience.

With regard to negotiations, acquirers who negotiate longer have higher announcement returns. However, teams with financial expertise are associated with a shortened negotiation length. In the post-merger assessment, teams cite the achievement of business plans as the most important indication of deal success. Some teams also report relying on CEO satisfaction to measure success. Interestingly, teams that rank the achievement of business plans as important have better returns while those emphasizing CEO satisfaction have lower returns. Teams with a higher tenure are more likely to measure deal success with the achievement of business plans. Thus, experience appears to foster criteria that leads to better outcomes.

Team factors explain a large portion of acquisition performance

In the last step, it is assessed whether latent team factors can explain the persistent acquirer fixed effects in driving merger gains. Findings suggest that M&A team factors explain approximately 54% of the acquirer fixed effects in announcement return regressions.

Literature reference

• Aktas, N./Boone, A./Witkowski, A./Xu, G./Yurtoglu, B. (2021): The Role of Internal M&A Teams in Takeovers, in: Review of Finance, Volume 25, Issue 4, July 2021, pp. 1047–108.