Master Thesis Defense

Rotterdam School of Management, Erasmus University Rotterdam

Department of Finance

Master Thesis

M&A and Corporate Governance

“Impact of CEO Compensation Structure on M&A Performance”

Anton Zhukov

Student ID: 336825

RSM Finance & Investments

Coach: Michiel Wolfswinkel

Co-reader: Jordan Otten

Date: 07/09/2012

Master Thesis Defense

Presentation Outline

• Topic Introduction

• Research Question

• Hypotheses

• Methodology & Data Collection

• Data Analysis

• Research Findings

• Conclusion

Master Thesis Defense

Topic Introduction

Topic - M&A and Corporate Governance

• Literature Review

I. Firm Size Theory

II. Free Cash Flow Theory

III. Hubris Hypothesis

IV. CEOs’ Personal Risk Hypothesis

Master Thesis Defense

Research Question

“…we document a strong positive relation between acquiring managers’ equity-based

compensation (EBC) and stock price performance around and following acquisition

announcements.” - Datta, Iskander-Datta, Raman (2001)

Master Thesis Defense

“How does CEOs compensation structure affect M&A performance?”

Hypotheses

M&A Performance measures

• Acquisition Premiums

• Acquisition Abnormal Returns (ARs)

Master Thesis Defense

• Equity-based compensation (EBC) and Acquisition Premiums

H1: Higher fraction of equity in total compensation leads to lower acquisition

premiums paid by acquiring companies.

• Equity-based compensation (EBC) and Acquisition Abnormal Returns

H2: Higher fraction of equity in total compensation leads to higher cumulative

abnormal returns (CARs) to the shareholders of acquiring companies.

Methodology & Data Collection

Independent Variable (X) in time t-1

CEO Compensation Components

• Base Salary

• Bonus

• Other Annual

• Restricted Stock Granted

• Options Granted (Black-Scholes)

• Long-term Incentives Payouts

• All Other Total

Master Thesis Defense

Dependent Variables (Y) in time t

Acquisition Premium Hypothesis

• Price per Share/Target Share Price 4

Weeks Prior to Announcement

Acquisition Abnormal Returns (ARs)

Hypothesis

• Cumulative Abnormal Returns (CARs)

• Market Model (MM) - benchmark

Methodology & Data Collection

Period: January 1, 1995 – December 31, 2007

Acquirer & Target are public companies

Industry: High-Tech

Location: the United States

Deal Type: Disclosed Value M&A

Deal Status: Completed

Acquiror holds more than 50% of stock after acquisition

Final Number of Analyzed Transactions: 332 transactions by 216 acquirers

Databases:

• Thomson One Banker

• Compustat Standard & Poor’s ExecuComp Annual Compensation (WRDS)

• CRSP/Compustat Merged - Fundamentals Annual (WRDS)

• Eventus (WRDS)

Master Thesis Defense

Data Analysis

Master Thesis Defense

Data Analysis

Master Thesis Defense

H1: Equity-Based Compensation and Acquisition Premiums

• Median equity-based compensation = 61.39%

Average Acquisition

Premium 1995-1999 2000-2002 2003-2007 1995-2007

High EBC Firms 55.61% 73.87% 46.30% 58.49%

Low EBC Firms 52.05% 50.19% 52.97% 51.88%

Data Analysis

Master Thesis Defense

H2: Equity-Based Compensation and Acquisition Abnormal Returns

• Median equity-based compensation = 61.39%

Average Cumulative

Abnormal Returns 1995-1999 2000-2002 2003-2007 1995-2007

High EBC Firms -4.18% -4.97% -2.26% -3.77%

Low EBC Firms -1.40% 0.02% -0.33% -0.77%

Findings

Master Thesis Defense

Regression Analysis

H1: Equity-based Compensation and Acquisition Premiums

PREMIUM = 50.753 + 0.035*OFFPR_TO_EPS – 0.192*EBC_PCT + εit

This confirms our initial H1 hypothesis, which holds that higher proportion of equity-

based compensation in a total CEOs’ compensation leads to lower acquisition premiums.

H2: Equity-based Compensation and Acquisition Abnormal Returns

CAR = -0.004 + 1.4189296448509635E-5*RSIZE - 4.315350812132981E-

4*EBC_PCT + εit

These findings contradict our initial hypothesis H2, which holds that higher fraction of

equity in total compensation leads to higher cumulative abnormal returns (CAR) to the

shareholders of acquiring companies.

Conclusion

Master Thesis Defense

• Higher fraction of equity in total compensation can lead to lower acquisition

premiums paid by acquiring companies.

• Higher fraction of equity in total compensation does not necessary lead to

higher cumulative abnormal returns (CARs) to the shareholders of acquiring

companies.

Possible explanation

“Risk-reducing strategies may be emphasized as managers expand their stock

ownership. Consequently the risk-reducing acquisitions lead to lower abnormal

returns to the shareholders of the acquiring firms.” - Wright et al. (2002)

Master Thesis Defense

Rotterdam School of Management, Erasmus University Rotterdam

Department of Finance

Master Thesis

M&A and Corporate Governance

“Impact of CEO Compensation Structure on M&A Performance”

Date: 07/09/2012

Master Thesis Defense