Do firms make decisions about when to merge based on sound business considerations, or personal agendas? We know that CEO pay increases with firm size, so corporate managers have an incentive to orchestrate takeovers in order to build their empire. On the other hand, CEOs of target firms may have personal reasons of ego, prestige, or pay to want to stay independent and thus in charge. Dirk Jenter and Katharina Lewellen find that merger-mania suddenly strikes when a firm’s CEO reaches retirement age:
This paper explores the impact of target CEOs’ retirement preferences on the incidence, the pricing, and the outcomes of takeover bids. Mergers frequently force target CEOs to retire early, and CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs’ private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers. These results suggest that the preferences of target CEOs have first-order effects on both bidder and target behavior.
This issue of linkage between executive retirement and mergers warrants further study. I once worked in a very minor way on a deal where part of the backstory was that the bidding firm’s CEO was near retirement and commitments were made that the CEO of the target company would take over as CEO of the combined firm a few years after the merger. That way it was a win-win for both firms’ executives, and it seems like the deal might not have gone down if not for that convenient timing.