By Desiree-Jessica Pely *
(exechange) — February 1, 2020 — Due to practitioners’ negative connotation with regard to mergers and acquisitions (M&A), the clear communication of takeover motives is crucial for stakeholders.
However, rather than providing clear objectives, managers tend to use a specific merger rhetoric (1) to “whitewash” an M&A deal and thereby create an ambiguous environment that leads to a lack of investment purpose (2). For example, stating too many M&A motives leads to inferior takeover and corporate performance.
Claiming many motives is linked to impression management or bullshitting behavior (3) to which less experienced shareholders overreact. Whereas individual investors learn that managers overpromised synergies over the course of the M&A integration phase, institutional investors already see through such behavior before the deal closes, creating arbitrage opportunities for sophisticated investors.
Even though it may seem that managers purposely attempt to misguide investors, this behavior is mostly due to managerial overconfidence. The manager is oftentimes not even aware of the consequences. Specifically, CEOs that oversell M&A are more likely to leave or be subsequently fired.
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(1) Merger rhetoric is measured qualitatively and quantitatively using computational linguistics.
(2) Berman, D. K. (2005). Mergers Horror II: the Rhetoric. The Wall Street Journal; Jenkins, H. W. J. (1998). Making Sense of Merger Mania. The Wall Street Journal; Jensen, M. C. (2010). Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Journal of Applied Corporate Finance, 22(1), 32–42.
(3) Frankfurt, H. On Bullshit. Princeton, NJ: Princeton University Press.
* The writer is a finance researcher at the Ludwig Maximilian University of Munich.