1Do CEOs in Mergers Trade Power for Premium? Evidence From “Mergers of Equals”

Abstract: In order to analyze target CEO incentives to negotiate shared control, I study abnormal returns in a sample of “mergers of equals ” transactions in which the two firms are approximately equal in post-merger board representation. Mergers of equals (MOEs) are friendly mergers generally characterized by extensive pre-merger negotiations between firms with more comparable bargaining positions resulting in both lower premiums and greater shared control (board and management) between target and acquiring firms. On average, acquirer shareholders capture more of the gains in MOEs measured by event returns, while target shareholders capture less, in comparison to a matched sample of transactions with unequal board representation (i.e. “mergers of non-equals ” or MONEs). However, the value created by MOEs measured by combined event returns is not significantly different than the matched sample. Moreover, both the value created and target shareholders ’ capture of the gains are systematically related to variables representing post-merger control rights. The evidence suggests that target CEOs negotiate shared control in the merged firm in exchange for lower target shareholder premiums