CEOs that perform a major deal during their first year in office outperform their peers in the long run, new research from the M&A Research Centre (MARC) at Cass Business School, London shows. The MARC team examined 276 major deals performed by CEOs during their first year in office between 1997 and 2009, across 12 industries including Financials, Energy & Power, Industrials, Materials, Retail, Healthcare, Telecommunications, Consumer Staples, Media and Entertainment, Consumer Products and Services, High Tech and Real Estate. The study looked at the effect a new CEO has on an organisation, how newly-appointed CEOs use M&A deals to change the strategic direction of a firm, and how successful this approach is. According to professor Scott Moeller, director of the Mergers and Acquisitions Research Centre at Cass Business School, “a merger, acquisition or major divestiture transforms an organization. Likewise, a change in CEO can also transform the direction of a company. As a result these two events are often linked, and this report shows the impact when they are combined.” From their sample, the study revealed that the median term for a CEO is just 4.4 years allowing a relatively small window for ‘game-changing' action. Therefore brokering a deal offers CEOs an opportunity to quickly reshape their companies and leave an imprint. The research found that in many cases a major strategic change by the CEO in their first year was beneficial - improving share performance, however, conducting more than one deal often led to poorer performance, as making too many deals too quickly hindered the development of the previous deal. “A new CEO knows that they are not going to be around forever. They have a limited amount of time to make an impact. This is why CEOs may feel pressure to do a deal in their first year in office. Our study provides support for these CEOs, as we found that the firms of these first-year dealmakers did outperform those who did not do a deal in their first year in office,” added Moeller. The report highlights four conditions that are likely to provide the appropriate environment for a new CEO to make a major deal: • Type of succession: if the CEO is appointed as the replacement for a predecessor who was ‘forced out'. • Type of recruitment: if the CEO is appointed externally. • Firm Performance: if the share performance has fallen below the expected level, prior to the CEO appointment. • Corporate governance: if the company has a high percentage of institutional share holders. A recent example that supports the MARC research can be found in British supermarket chain Asda, where CEO, Andy Clarke, who has only been in office for a month, has moved quickly by launching a £778 million bid for Danish-owned supermarket chain, Netto. “Asda's bid for Netto marks yet another major deal announced by a newly appointed CEO. New CEOs don't have long to make an impact and they are eager to leave their mark and flex their muscles. Our study shows that bold CEOs who perform a deal during their first year in office will outperform their more passive peers in the longer term, so this does indicate possible success for Andy Clarke, who took over less than a month ago!” added Moeller. “Although the focus of the study was European, the factors driving the decision-making process at the board and CEO level would be expected to be the same in the Middle Eastern market,” Moeller continued. Tom Hodgson, director, Middle East Corporate Finance at a leading accountancy firm and Cass Business School EMBA student, added: “I certainly agree that if a CEO makes a successful M&A deal in their first year, especially if it is transformational, then they are more likely to survive the test of time. I believe this would stand true in all markets.” “A merger, in its purest form, will often create in essence a new organization, with a new structure, shareholder base, culture, etc, and the CEO behind the merger will be seen as the architect behind this “new” organization. This is similar to the entrepreneur behind an owner-managed business, who often achieves an iconic status within the business and is incredibly difficult to replace. The CEO behind a successful merger will often be seen in a similar light. Of course this works both ways and the CEO behind an unsuccessful merger will typically have a limited shelf
