Investment Banking

• Skip The Block Party, Since Big Profits Await In Smaller Equity Deals

Financial Reporting, Taxation, & Accounting

• Establishing A New Internal Control Function: Tough But Essential Task

• Sarbanes-Oxley Rule 404 Now A Costly, Time-Consuming Reality Show

• Sarbanes-Oxley 404 Software Helps To Bridge Compliance Gaps

Equity & Debt Offerings

• Allowing The Use Of Unregistered Finders Would Help Small Businesses

• Going Public With A Commercial Bank May Reduce IPO Underpricing

Corporate Governance & Directors' Duties

• Board Work Is Tougher These Days, But Precautions Can Minimize The Risk

• Canadians Consider National Compliance Guidelines

Corporate Entities & Structures

• Public To Private: The New Small And Mid-Cap Choice

Mergers & Acquisitions

• Acquiror’s Shareholders Tend To Approve Mergers, But Not With A Rubber Stamp

• Structure Deals With Earnouts Clearly And Carefully To Avoid Future Trouble

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A perfunctory process. Although stock acquisitions often dilute shareholder wealth, the overwhelming majority of shareholders at the acquiring companies vote in favor of them. Finance professors Timothy Burch, Angela Morgan, and Jack Wolf examined 209 merger-approving proxy votes conducted by acquirors and determined that the mean approval rate was an astounding 98%. Yet research has repeatedly shown that acquirors’ shareholders often experience substantial ownership dilution in stock-for-stock deals, as well as erosion of stock value at the time of the announcement. Their behavior raises questions about why shareholders consistently approve such deals, even to their own potential detriment. The authors reviewed several explanations: The level of shareholder support may depend on the perceived quality of the deal or reflect the stock market returns surrounding the announcement; shareholders might study the details of a proposed merger; or perhaps they simply and perfunctorily accept management’s seal of approval. If the latter holds true, shareholders may not add the checks and balances to management’s acquisition policy that the voting process implies, making shareholder votes an ineffective monitoring tool.

Negative voters sit it out. The mean approval rate, when all shareholders with voting rights are included, is 73%. The authors compare this to the 98% mean approval rate when counting only the votes cast. They conclude that shareholders who would vote against a merger are more likely to sell their stock before the vote or to simply not vote at all. The quantum of vote, whether by voting rights or by number of votes cast, is generally a matter dictated by state law. Shareholders with negative views affect the outcome in voting rights, but not outcomes based on votes cast. Nevertheless, even though most shareholders who vote usually approve of a merger, reaching the quorum for a valid vote can prove difficult.

Firm characteristics important. The research shows that characteristics of the acquiror and the target, as well as of the proposed combination, affect approval rates. A tendency for institutions to rely on recommendations from managers or from their advisory service—which generally favor acquisitions—might explain increased approval rates at acquirors with high levels of institutional ownership. An alternative explanation, the authors suggest, is that companies with high institutional ownership carefully evaluate the deals they propose. Recent operating and stock market performance do not seem to affect approval rates, although shareholders apparently believe that a large cash stockpile could signal poor acquisition choices by management. Voters also consider other factors, including target size and cash included in the bid.

An indirect monitoring device. The authors’ analysis shows that even with overwhelming acceptance, merger voting serves as an indirect monitoring device. The very threat of a failed vote appears to prompt managers to propose only acquisitions that they believe will receive approval, even if passage means campaigning for votes. The fact that some acquisitions pass by only a narrow margin indicates that managers may, at times, overestimate shareholder support. Five percent of the deals studied had an approval rate or voter turnout of less than 60%. These results should prompt managers considering a merger not to take shareholder support for granted.

Abstracted from Financial Management, published by Financial Management Association, University of South Florida, College of Business Administration, 4202 East Fowler Avenue, Tampa, FL 33620-5500. For more information, call (813) 974-2084; or visit www.fma.org.