New research often examines how firms implement the takeover process from deal origination through post-merger assessment by surveying the largest firms in Austria, Germany, and Switzerland. But it is also worth assessing whether and how internal teams add value to the M&A process. A scientific study now has shown that internal M&A teams emphasizing economic rationales, screening more targets, negotiating longer, and relying on KPIs for deal success perform relatively better. Team characteristics such as size, tenure, and financial expertise also matter for acquisition performance.
The economic importance of mergers and acquisitions (M&As) has spurred extensive research into the drivers of takeover activity 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.
Tips for practitioners
- Firm-specific, internal factors are relevant in driving outcomes in the takeover market.
- Certain characteristics of internal M&A teams influence the practices across different stages of the M&A process.
- Firms can benefit from a better understanding of which team characteristics lead to better practices and form their internal M&A teams accordingly.
- Despite their ubiquitous presence in the M&A process, external advisors not necessarily bring better returns about.
- CEO overconfidence is an important factor why a large portion of M&A deals fails ex post. This might also play a role in the internal teams executing the M&A process. Therefore, it is important to give the right incentives to internal M&A managers.
Professor Dr. Nihat Aktas
Nihat Aktas holds the Chair of Mergers and Acquisitions at WHU – Otto Beisheim School of Management since 2013. He teaches business valuation and mergers and acquisitions in various programs. His research interests mainly focus on mergers and acquisitions, form a corporate finance perspective, and has been widely published in international peer-reviewed journals. Professor Aktas is also a member of the Supervisory Board of a medium size company active in the chemical industry.
Professor Dr. Burcin Yurtoglu
Burcin Yurtoglu holds the Chair of Corporate Finance at WHU – Otto Beisheim School of Management since 2010. He teaches various courses in the area of finance at MSc and MBA programs. His research focuses mainly on topics in corporate governance and corporate finance.