RESEARCH: BIG IDEAS
GUARDING AGAINST HOSTILE TAKEOVERS, WORRIED CEOS EMPHASIZE THE BAD NEWS CHIEF EXECUTIVES FOCUS ON THE NEGATIVE TO PROTECT THEIR COMPANIES, NEW RESEARCH SHOWS by Deborah Lynn Blumberg
“O
ur profit margins aren’t looking good,” the chief executive glumly told investors listening in on the company’s earnings call. “Unfortunately, I see gathering storm clouds in the coming quarter.” Asked to picture CEOs, investors probably think of confident leaders offering positive statements about their companies, predicting rosy future earnings and pointing to news that’s favorable to their business. But chief executives whose peers are targeted for hostile takeovers — and who worry their companies could be next — take an approach that departs from the common wisdom about cheerleading CEOs. “Peer companies of hostile takeover targets promote bad news forecasts to mitigate the probability of becoming the next takeover target,” says Shuping Chen, the Wilton E. & Catherine A. Thomas Professor of Accounting at Texas McCombs. She is the lead author of a new paper that looks at the voluntary disclosures made by takeover targets’ peer companies. Their CEOs voluntarily offer company forecasts that highlight the negative, and they tend to bundle these downbeat outlooks with earnings announcements to increase the visibility of the bad news. The anxious executives also use a more negative tone and words during conference calls as a way to highlight the bad news, which tends to increase
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the market’s uncertainty about a company’s value and limit takeover interest. To show how these peer companies tend to strategically emphasize bad news, Chen and her colleagues Bin Miao of Chinese University of Hong Kong and UT alum Kristen Valentine, Ph.D. ’19, of the University of Georgia examined a group of hostile takeover targets during a seven-year period along with companies they identified as the takeover targets’ peers. THE PRESSURE OF BEING ACQUIRED
Chen and her colleagues identified 112 hostile takeover targets from 1997 to 2014 using the Securities Data Company (SDC) database, which provides information on M&A transactions. One takeover target was pharmaceutical company Allergan Inc. Its peer businesses Bausch Health Companies Inc. and Gilead Sciences Inc. both saw a three-day stock price increase on the heels of the news of the takeover. Other companies in the study included AIG, Morgan Stanley, Ford, GM, CVS Health, and Microsoft. By zeroing in on companies whose stocks saw positive three-day cumulative abnormal returns at the time of the hostile takeover announcement, the authors identified about 3,500 unique peer companies under pressure of acquisition. Higher-than-usual stock moves suggest investors believe these companies could also become takeover targets.
Using four measures, the researchers compared these peer companies to a control group of companies neither under threat of takeover nor considered to be a peer of a company under threat. The four measures were the number of positive or negative earnings forecasts, how often forecasts were bundled with earnings announcements, the tone of the presentation section of quarterly conference calls, and whether companies spread negative words (including “arrears,” “canceled,” “insufficient,” “lack,” and “refusal”) evenly throughout the conference call presentation to reinforce the negative message. The researchers found that peers of companies under the threat of acquisition tended to hone in on bad news when discussing their own company. A PENCHANT FOR NEGATIVE NEWS
Chen also found that peer companies with CEOs under age 60 and those with a higher total compensation relative to their industry peers, especially, focused on negative news because they have more of an incentive to avoid an acquisition. “If I’m 30 years old, I have a lot more lifetime earnings to lose if I’m acquired,” she says. “And if I have more to lose, I fight harder.” Earlier research has found that two-thirds of CEOs at acquired companies get fired and rarely find another CEO position after they’re let go.
