Merger Motives For U.S. Utility Acquirers: Evidence From Performance, Risk Metrics, And Executive Compensation

Abstract

We study post-acquisition performance of US public utilities that acquired other US exchange listed firms during 1996?2002.  We find that acquirer shareholders do not gain any abnormal returns from the acquisition over the two years following the acquisition and there are no unexpected gains in the underlying operating performance of the acquirers. We also find that while stock acquirers show a decrease in post-acquisition performance, their CEO salary increases relative to the industry. This suggests that method of payment may be an important factor in discerning the motivation for an acquisition. Lack of clarity regarding effects of a complex process like an acquisition, for shareholders and perhaps the even the management, combined with potential increase in prestige and salary for the management, may be the motivation for M&A activity in stock mergers. Cash acquirers may be more careful and consequently do not show subsequent underperformance.