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The urge to conquer
Because, as discussed before, when a rm acquires another
company, it usually pays a hefty premium. That is, the rm pays
quite a bit more for the company’s shares than the price it is
trading at on the stock market before the takeover, just to be able
to obtain a majority, and hence a controlling, stake.
According to academic research, this premium usually lies
somewhere between a whopping 50 and 70 percent, dependent
on the industry, the size of the rm, etc. The justication for
paying such a signicant premium is the idea that the acquiring
rm will be able to get much more value out of the company
than the seller does. As I’ve said before, the facts show that
they’re usually wrong, but rms still do it!
It gets interesting when you analyze who pays the biggest
premiums. My former colleague at the London Business
School, Mathew Hayward, now at the University of Colorado,
together with his colleague Don Hambrick, performed a slightly
mischievous analysis. They gured that CEOs who are full of
themselves would pay higher premiums – because they suffer
from “hubris” and are more likely to overestimate their own
ability to turn around “failing” companies. Therefore, they
counted the number of favorable articles that had appeared
about them in the business press (such as The Financial Times,
Business Week, etc.).
Subsequently, they computed whether CEOs who had received
more media praise paid more for their acquisitions. The answer
was: absolutely YES!! To be precise, each highly favorable article
about a company’s CEO would increase the premium paid by
no less than 4.8 percent. For an acquisition of a billion dollars,
this would equate to 48 million dollars . . . And that is for every
article!
And this really is $48 million down the drain, because
Hayward and Hambrick also showed that CEOs with more
favorable press were completely unable to create additional
value out of those acquisitions. They had simply overesti-
mated themselves.