To Guard Against Hostile Takeovers, Worried CEOs Emphasize Bad News

Chief executives focus on the negative to protect their companies, new research shows

Based on the research of Shuping Chen

“Our profit margins aren’t looking good,” the chief executive glumly told investors listening in on the company’s earnings call. “Unfortunately, I see gathering storm clouds in the coming quarter.”

Asked to picture CEOs, investors probably think of confident leaders offering positive statements about their companies, predicting rosy future earnings and pointing to news that’s favorable to their business.

But chief executives whose peers are targeted for hostile takeovers — and who worry their companies could be next — take an approach that departs from the common wisdom about cheerleading CEOs.

“Peer companies of hostile takeover targets promote bad news forecasts to mitigate the probability of becoming the next takeover target,” says Shuping Chen, the Wilton E. & Catherine A. Thomas Professor of Accounting at Texas McCombs. She is the lead author of a new paper that looks at the voluntary disclosures made by takeover targets’ peer companies.

Their CEOs voluntarily offer company forecasts that highlight the negative, and they tend to bundle these downbeat outlooks with earnings announcements to increase the visibility of the bad news.

The anxious executives also use a more negative tone and words during conference calls as a way to highlight the bad news, which tends to increase the market’s uncertainty about a company’s value and limit takeover interest.

To show how these peer companies tend to strategically emphasize bad news, Chen and her colleagues Bin Miao of Chinese University of Hong Kong and UT alum Kristen Valentine, Ph.D. ’19, of the University of Georgia examined a group of hostile takeover targets during a seven-year period along with companies they identified as the takeover targets’ peers.

The Pressure of Being Acquired

Chen and her colleagues identified 112 hostile takeover targets from 1997 to 2014 using the Securities Data Company (SDC) database, which provides information on M&A transactions. One takeover target was pharmaceutical company Allergan Inc. Its peer businesses Bausch Health Companies Inc. and Gilead Sciences Inc. both saw a three-day stock price increase on the heels of the news of the takeover. Other companies in the study included AIG, Morgan Stanley, Ford, GM, CVS Health, and Microsoft.

By zeroing in on companies whose stocks saw positive three-day cumulative abnormal returns at the time of the hostile takeover announcement, the authors identified about 3,500 unique peer companies under pressure of acquisition. Higher-than-usual stock moves suggest investors believe these companies could also become takeover targets.

Using four measures, the researchers compared these peer companies to a control group of companies neither under threat of takeover nor considered to be a peer of a company under threat.

The four measures were the number of positive or negative earnings forecasts, how often forecasts were bundled with earnings announcements, the tone of the presentation section of quarterly conference calls, and whether companies spread negative words (including “arrears,” “canceled,” “insufficient,” “lack,” and “refusal”) evenly throughout the conference call presentation to reinforce the negative message. The researchers found that peers of companies under the threat of acquisition tended to hone in on bad news when discussing their own company.

A Penchant for Negative News

Chen also found that peer companies with CEOs under age 60 and those with a higher total compensation relative to their industry peers, especially, focused on negative news because they have more of an incentive to avoid an acquisition.

“If I’m 30 years old, I have a lot more lifetime earnings to lose if I’m acquired. And if I have more to lose, I fight harder.” — Shuping Chen

Earlier research has found that two-thirds of CEOs at acquired companies get fired and rarely find another CEO position after they’re let go. Chen and colleagues also noted more negativity from companies with weaker anti-takeover provisions, such as staggered boards, blank check preferred stock, and restrictions on calling special meetings or acting through written consent.

What’s more, the researchers found that managers at these peer companies under threat managed earnings expectations downward, in line with their overall strategy of sticking to negative news.

This penchant for negative news contrasts with the behavior of managers at companies in the midst of takeovers who favor projecting good news as they attempt to secure favorable acquisition terms.

No One-Size-Fits-All Approach

The study reveals that not all of CEOs’ career concerns automatically prompt them to promote good news about their companies.

“In other words, a one-size-fits-all approach to infer CEOs’ disclosure incentives is premature.” — Shuping Chen

What’s more, the research shows that while some bad news disclosures are truly about the company underperforming, others are about obfuscating the good performance of the company, she adds.

Future research might look at whether acquirers can differentiate between the two kinds of bad news disclosure made by potential targets: true bad news versus bad news that’s disclosed to hide good performance.

“Corporate Control Contests and the Asymmetric Disclosure of Bad News: Evidence from Peer Firm Disclosure Response to Takeover Threat,” is forthcoming, online advance in The Accounting Review.

Story by Deborah Lynn Blumberg