Do Firms With Specialized M&A Staff Make Better Acquisitions?

Sinan Gokkaya is associate professor of finance at Ohio University College of Business; Xi Liu is assistant professor of finance at Miami University; and René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

Despite the importance of mergers and acquisitions (or just acquisitions for simplicity) for corporations and for the reallocation of capital within the economy, there is still considerable debate on whether firms create value for shareholders with these investments and why so many acquisitions appear to be unsuccessful. In an attempt to understand the drivers of acquisition performance, an enormous finance literature has focused on acquirer and target characteristics, on the incentives and characteristics of CEOs and directors, the nature of the deals, and so on. However, this literature has not penetrated inside the black box of the firm’s internal decision-making process for acquisitions, most likely because of difficulty in measuring organizational structure and skills pertaining to acquisitions. In our paper titled “Do firms with specialized M&A staff make better acquisitions?”, we open this black box by manually constructing a novel and comprehensive sample of US public firms employing specialized M&A staff from 2000 to 2017 and provide the first in-depth investigation of the impact of specialized M&A staff on acquisition outcomes.

In the US, corporate staff focused on acquisitions, which we call specialized M&A staff, are corporate development professionals housed in corporate development departments. Specialized M&A staff are involved in all aspects of the acquisition process including, but not limited to, development of a firm’s inorganic growth strategy, identification of targets from internal pipelines and information memorandums sent by investment banks, performing synergy and valuation analyses on transactions, participating in deal negotiations with the target, undertaking financial due diligence, analyzing post-merger integration, and comparing ex-post M&A outcomes to pre-acquisition forecasts. If the interests of the managers and shareholders are aligned and management is focused on maximizing shareholder wealth, it will employ specialized M&A staff if such staff is expected to improve sufficiently its ability to identify more suitable targets and better integrate the target firms. This view leads to our value creation hypothesis, which is that firms with specialized M&A staff make better acquisitions.

We manually construct a comprehensive sample of firms with specialized M&A staff using Boardex Individual,, Bloomberg, Reuters, and Marquis Who’s Who databases. We find that 36.56% of all public firms have specialized M&A staff between 2000 and 2017, and the percentage of firms employing such staff exhibits an upward trend over time. When we focus on the employment of specialized M&A staff by acquirers, we find that 47.01% of acquisitions are executed by firms employing such staff over the sample period.

A traditional measure of acquisition performance is the abnormal stock price reaction to the announcement of an acquisition. We find that the average five-day cumulative abnormal return (CAR) over the [-2, +2] event window surrounding the acquisition announcement is 0.75% and significant at the 1% level for firms with specialized M&A staff. By contrast, the five-day CAR for acquisitions by firms without such staff is insignificantly negative (-0.12%). The difference between the two samples is significant, translating into a $95.77 million higher abnormal shareholder wealth gain per acquisition by firms with specialized M&A staff. When we perform multivariate regressions that explicitly control for an array of firm, deal, CEO and director characteristics (along with industry-year fixed effects), we find that specialized M&A staff is among the most important factors related to acquisition performance.

A valid concern is whether our results are robust to using . We find that our results remain similar when we extend the pre-acquisition announcement window to account for potential market anticipation of deal announcement and measure post-announcement event returns over a longer window. We further find that our evidence is equally strong for performance metrics that are not based on stock returns. We find that firms with specialized M&A staff 1) are less likely to divest acquisitions, 2) have their consensus analyst earnings forecasts increase more following the acquisitions, 3) have their abnormal operating performance improve more in the post-acquisition period relative to the pre-acquisition year, and 4) are less likely to make an acquisition with a large shareholder wealth loss.

Having found that known determinants of acquisition performance do not explain the better acquisition performance of firms with specialized M&A staff and that our results are robust to alternative performance metrics, we then show that it is unlikely that potentially non-random matching between specialized M&A staff and acquirers explains our results. The most obvious possible explanation for our results is that firms hire specialized M&A staff in anticipation of valuable future acquisition opportunities. For instance, if a firm believes that it can increase shareholder wealth through an acquisition strategy, it may be more likely to hire specialized M&A staff. If so, higher acquisition returns are not the result of employing specialized M&A staff, but instead, are due to acquiring firms having better inorganic growth opportunities. For instance, we examine how acquisition performance varies for the same firm between periods when it has specialized M&A staff and periods when it does not, we find that acquisition performance is higher when firms have specialized M&A staff. Further, we match acquisitions of firms with specialized M&A staff

Perhaps most importantly, we exploit a source of exogenous variation in the probability of employing specialized M&A staff, namely We expect the adoption of IDD to increase the likelihood that a firm employs specialized M&A staff since such staff is less likely to be poached by rival firms—former employees represent the greatest source of risk for losing such trade secrets Using this source of exogenous variation, we find that firms are indeed more likely to employ specialized M&A staff following the staggered adoption of IDD. Importantly, accounting for this source of exogenous variation does not affect the conclusion that

How does specialized M&A staff create value for the acquirer’s shareholders? Our results suggest that specialized M&A staff helps acquirers identify targets that have higher synergies with the acquirer as reflected in higher combined announcement returns and improvements in the combined firm’s abnormal operating performance in the post-acquisition period. We do not find evidence that specialized M&A staff drives a better bargain for the acquirer in that such acquirers capture more of the combined synergy gains or pay lower takeover premiums. Moreover, while these firms do not seem to retain fewer external advisors, we find that they pay lower advisory fees. The lower fees paid by firms with specialized M&A staff further suggest that the specialized M&A staff performs some tasks that otherwise would be performed by the investment bankers.

The complete paper is available for download here.

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