When assessing M&A targets, there’s another factor boards may want to consider apart from financial performance and cultural fit: have the CEOs of rival companies won any awards lately?
Yes, that’s right, it turns out that CEOs mindful of their colleagues’ success could pursue M&A to boost their own social status. And the result could be embarking on deals that don’t necessarily enhance shareholder value.
To test for the existence of the green-eyed monster, academics at Indiana University and Rice University analyzed the habits of CEOs from the S&P 1500 index. Their resulting paper, “The Ripple Effects of CEO Awards: Investigating the Acquisition Activities of Superstar CEOs,” has been accepted for publication in the Strategic Management Journal.
They discovered that CEOs engaged in more intensive acquisition activities in the period after their competitors won awards. The effect was amplified for CEOs that had a high likelihood of winning an award but just missed out.
To be sure, there could be alternative explanations for a link between CEO awards and acquisitions by rivals. Had a CEO won an award for successfully growing their company, their rivals, by default, would be under strategic pressure to grow, too.
Still, the study also found that acquisitions led by award-losing CEOs immediately realized lower share-market returns compared to deals overseen by the same CEOs in the pre-awards period.
“If your direct competitor for a job or a close peer wins something and you don’t, you very likely will compare yourself to that person, saying, ‘OK, what can I do to get that?'” Indiana University assistant professor Wei Shi said.
“Having these awards helps the winner dramatically increase social recognition. This creates a social comparison motivation, as the CEO compares himself or herself to the person who won.”
And why is an M&A an outlet for their competitiveness? Shi said it may be because business media outlets will write about them, and the firm will grow, increasing social recognition.
Whatever the motivation for pursuing deals, whether emotional or genuinely strategic, the bottom line for boards is beware.
“When a CEO is proposing to do a deal, consider its timing,” Shi said. “If it’s right after the CEO’s peer wins an award, there may be some personal motives there that could have negative consequences for the firm.”