What is this about?

• Mergers and acquisitions (M&A) are among the most consequential strategic decisions managers make. But markets often respond negatively to acquisition announcements, which means investors are skeptical about the transactions, their terms, or managerial motivations.
• Prior research suggests such skepticism may be well-founded: In quarters following acquisitions, CEOs in the U.S. are 28% more likely to exercise options and 23.5% more likely to sell stocks than they are in quarters not following acquisitions. This behavior implies that:
  • CEOs have low confidence in the value creation of their deals and
  • the motivation for them may stem more from private interests or external pressures.

Acquisitions are strategic events in which the firm learns a wealth of non-public information about the target and the combined firm’s prospects, leading to a significant information asymmetry between managers and market investors.

• An indicator of low CEO confidence would offer investors an early clue about potential challenges with the deal that the firm anticipates.

What’s behind firms’ communications around the M&A?

• Look at firms’ communications around the time of an acquisition announcement. Prior research has shown that firms anticipate negative market reactions to acquisition announcements and successfully use impression offsetting as a way to reduce those negative responses.

For example, consider Chevron announcing an acquisition of Unocal in 2005. The day after the acquisition announcement, Chevron announced three positive, unrelated news items: a supply deal, a deal to increase gas volume, and a product attainment of a new standard’s requirement. To carry out the acquisition, Chevron had to fend off a rival bidder, and it might have been anticipating scrutiny associated with the high price it ultimately paid.

• To examine the question of whether impression offsetting is an indicator of low CEO confidence,
  • data on acquisitions S&P 500 firms announced between 1995 and 2009 are collected;
  • additional data about the acquiring and target firms, the acquiring firm CEO, press release activity, insider transactions, and stock prices are then integrated. 
• It’s theorized that acquiring firms would be more likely to issue unrelated positive press releases
  • When their CEOs were motivated by self-interest or by external pressure to grow the firm; and
  • When acquisitions might not be in the best interests of shareholders;
  • Older CEOs tend to perceive greater risk than younger ones;
  • CEOs of highly reputable firms may expect stakeholders to scrutinize their acquisition decisions more;
  • CEOs in dynamic industries (biotechnology or computer software) see their competition moving so quickly that making an accurate assessment of acquisition potential is more challenging

What’s the result of the impression offsetting?

• Findings in a forthcoming paper in the Academy of Management Journal showed that a CEO whose firm issued more unrelated positive press releases around the time of an acquisition exercised 6.7% more options (~ $220,000) in the next quarter than a CEO whose firm did not. This shows that more impression offsetting may signal that CEOs have low confidence in the deal.
• This relationship became even stronger when there were potential perceptions of higher risk.  CEOs of reputable firms were more inclined to either use impression offsetting and later exercise options or to do neither, suggesting that their sense of risk had more of an influence on their decisions.

The bigger picture

• This finding is an example of how firms strategically approach external communications, in addition to content, communication timing matters.
  • Investors may be well–served to view firm communications as part of the firm’s overall strategy;
  • Media relations professionals may want to weigh the risk of whether being “caught” managing impressions could backfire.
• For boards and compensation committees, our findings suggest that CEOs are closely attuned to the personal financial risk associated with their compensation and that they actively work to protect it.
  • Public companies try to align managers’ incentives with those of shareholders, which is why they tie executive compensation to firm stock performance;
  • But if CEOs are worried about the stock price falling, say due to concerns about an acquisition, they may take steps to preserve their wealth.
• There are also further questions for us to explore.
  • Does impression offsetting also signal low confidence in other types of announcements – such as alliances, new products, or earnings forecasts?
  • What other unintentional signals do firms send, whether optimistic or pessimistic?
  • With this impression offsetting tactic now demystified, will markets begin to punish firms for using it?

Content source: GamacheGerry.D.L, McNamara.G, GraffinJason.S.F,Kiley.J.T, Haleblian.J, and Devers.C.E (2019) Why CEOs Surround M&A Announcements with Unrelated Good News. HBR. Available from: https://hbr.org/2019/08/why-ceos-surround-ma-announcements-with-unrelated-good-news?ab=hero-subleft-2 [Accessed 1 September, 2019]