The Role of Internal M&A Teams in Takeovers

July 22, 2021

The Role of Internal M&A Teams in Takeovers
Nihat Aktas, Audra Boone, Alexander Witkowski, Guosong Xu, Burcin Yurtoglu
Review of Finance, Volume 25, Issue 4, July 2021,Pages 1047–1088, https://doi.org/10.1093/rof/rfaa034

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 literature, much of the variation in both the propensity to conduct deals and the wealth effects remains unexplained. Scholars have recognized that firm-specific M&A practices account for a substantial portion of acquirer returns. Despite the importance of internal factors in driving the takeover market, such details have remained largely unexplored, in part due to the lack of data. This paper 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.

We examine how firms implement the takeover process by surveying the largest firms in Austria, Germany, and Switzerland. Responses from 65 firms indicate that internal M&A teams play an active role in shaping their acquisition activities. Our main 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 M&A stages. 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.

At deal initiation, the respondents overwhelmingly cite economic rationales to motivate takeovers, but some also stress behavioral reasons such as market timing. 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 a 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 with higher likelihood of pursuing deals for behavioral reasons and less target screening. Coupled with the evidence that these teams also achieve lower returns, the results suggest overconfidence associated with financial experience.

Analyzing negotiations, we find that acquirers who negotiate longer have higher announcement returns. However, we find that 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. We find that 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.

In the last step, we assess whether latent team factors can explain the persistent acquirer fixed effects in driving merger gains. We find that about 54% of the acquirer fixed effects can be contributed to the M&A team factors.