Master Thesis Defense. Topic "Impact of CEO Compensation Structure on M&A Performance" (Rotterdam School of Management/ Erasmus University)

1. 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

2. Presentation Outline
• Topic Introduction
• Research Question
• Hypotheses
• Methodology & Data Collection
• Data Analysis
• Research Findings
• Conclusion
Master Thesis Defense

3. 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

4. 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)
“How does CEOs compensation structure affect M&A performance?”
Master Thesis Defense

5. Hypotheses
M&A Performance measures
• Acquisition Premiums
• Acquisition Abnormal Returns (ARs)
• 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.
Master Thesis Defense

6. Methodology & Data Collection
Independent Variable (X) in time t-1 Dependent Variables (Y) in time t
CEO Compensation Components Acquisition Premium Hypothesis
• Base Salary • Price per Share/Target Share Price 4
• Bonus Weeks Prior to Announcement
• Other Annual
• Restricted Stock Granted Acquisition Abnormal Returns (ARs)
• Options Granted (Black-Scholes) Hypothesis
• Long-term Incentives Payouts • Cumulative Abnormal Returns (CARs)
• All Other Total • Market Model (MM) - benchmark
Master Thesis Defense

7. 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

8. Data Analysis
Master Thesis Defense

9. Data Analysis
H1: Equity-Based Compensation and Acquisition Premiums
• Median equity-based compensation = 61.39%
Average Acquisition
1995-1999 2000-2002 2003-2007 1995-2007
Premium
High EBC Firms 55.61% 73.87% 46.30% 58.49%
Low EBC Firms 52.05% 50.19% 52.97% 51.88%
Master Thesis Defense

10. Data Analysis
H2: Equity-Based Compensation and Acquisition Abnormal Returns
• Median equity-based compensation = 61.39%
Average Cumulative
1995-1999 2000-2002 2003-2007 1995-2007
Abnormal Returns
High EBC Firms -4.18% -4.97% -2.26% -3.77%
Low EBC Firms -1.40% 0.02% -0.33% -0.77%
Master Thesis Defense

11. Findings
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.
Master Thesis Defense

12. Conclusion
• 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

13. 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