Company bosses with a narcissistic streak are more like to make large M&A deals than their humbler counterparts, but shares often react less favourably to such takeovers than smaller ones, broker Liberum said in a note.
Citing research by Tom Aabo of Aarhus University in Denmark, which examined 751 takeovers in the UK between 2007 and 2016, Liberum said humble CEOs made on average three acquisitions during the 10-year period, each worth about £57mln, while the high-stakes chiefs spent an average of £351mln on one big deal.
The research revealed that large acquisitions on average led to an abnormal share price increase of 0.6% on the day of the announcement, well below the 2.7% average rise for the smaller deals.
As CEOs who acquire larger targets do so less often than those who buy smaller firms, the effect accumulates over time and leads to a better share price performance for companies that make smaller, less costly acquisitions, Liberum said.
“In some instances, competitiveness can go too far, and in an effort to outdo their peers, CEOs start to make poor decisions,” said Liberum analyst Joachim Klement.
“So instead of acquiring smaller companies that may be a better fit with an existing business and can more easily be integrated into the existing corporate structure (and adopt the existing corporate culture), some CEOs are going for fewer but larger mergers and acquisitions deals. That might end well, just as sometimes a drunk at a bar says ‘hold my beer’ and then actually does perform some amazing feat.
“But usually, giving a CEO a lot of cash to spend on M&A is like giving a drunk a barrel of beer. You know exactly what is going to happen, you just don’t know which wall he is going to hit.”
So how can investors and company directors identify the high-stakes bosses and restrict their acquisition budgets to avoid destroying shareholder value?
In the Danish study, the CEOs that went big were the ones that showed more signs of narcissistic behaviour. For example, they used more personal pronouns that pointed to themselves.
“The higher the ratio of first-person personal pronouns to collective pronouns, the more likely it is that a CEO will try to engage in ridiculous outsized acquisitions that will lead to lower shareholder value,” Liberum said.