The Strategic Management Journal had a thought provoking piece, Owners on Both Sides of the Deal: Mergers and Acquisitions and Overlapping Institutional Ownership. They highlight the potential agency problem overlapping institutional ownership can present during with M&A transactions. In looking at deals where both the bidder and target where public since 1999, I noticed a few key trends:
The number of deals (at least involving two public companies) with overlapping ownership has decreased in the past decade
For deals with overlapping ownership, the average number of overlapping holders and their average percentage held in the bidder and target have increased through time.
The second point is not surprising but does highlight the potential importance of a few of the key points addressed in the paper. Overall, they found that deals involving overlapping ownership resulted in a decrease in shareholder value for the acquiring firm. While they suggest a few potential reasons, one I found interesting was that “investors with stock interests in both the acquiring and target firms have different perspectives on the proposed business combination than do investors in only the acquiring firm.” With this view, they highlight the need for strong corporate governance.
A potential overlay of ESG scores focusing on board control, executive compensation, and managerial ownership would be an interesting next step. What is the performance like of acquiring firms with overlapping institutional ownership and strong or weak corporate governance?
Goranova, Maria L. and Dharwadkar, Ravi and Brandes, Pamela M., Owners on Both Sides of the Deal: Mergers and Acquisitions and Overlapping Institutional Ownership (October 1, 2010). Strategic Management Journal, 31(10): 1114-1135, 2010. Available at SSRN: https://ssrn.com/abstract=2384633