Merger And Acquisitions

1. INTRODUCTION

The agency problem that exists in Merger and Acquisitions deals in recent years creates potential value-destroying mechanism to the firm. Jensen (1986) argues that there is a conflict of interest between the managers and shareholders over such issues as the optimal size of the firm and the payment of cash to shareholders. He argues that managers seem to invest the firm free cash flow to build their own empire in his own interest. Roll (1986) in his paper states that manager believes their own valuations are superior to the market, which causes them to overpay. Managers seem to know that they are overpaying but still do the deals intentionally to pursue their own goals. The argument stated by Roll supports the agency problem

One of the mechanisms that potentially could improve M&A performance is corporate board monitoring. Monitoring by the board is important internal control mechanism because it could mitigates potential conflict of interest between managers and shareholders. From the past literature, McWilliams and Sen (1998) is among the first that try to study the relation between the merger and acquisition and organizational features related to board monitoring. In their paper, McWilliams and Sen (1998) try to analyze the joint effect of board monitoring characteristics on the market response to antitakeover amendments proposal. Because of the hostile takeover that is both unwanted and damaging to the firm value, company’s management takes a periodic or continual measure in order to prevent it to happen. Antitakeover amendments proposal here is that particular measure. McWilliams and Sen (1998) argue that studying antitakeover amendments are important because the debate surrounding the amendments and conflicting empirical evidence. The amendments can be either beneficial or detrimental depending on how the managers use them. On the one hand managers can use the amendments to extract higher takeover bid, but on the other hand amendments could entrench themselves at the expense

Classification could preserve management’s benefits of control, either through bid deterrence or after a bid has been processed through bid hostility and a lower incidence of auction or bid completion (Bates, Becher, and Lemmon, 2008). Managerial discretion can also account for results in friendly and completed takeover. Hartzell, Ofek, and Yermack (2004) and Wulf (2004) proof in their literature that target managers can involve in self-dealing in negotiations with bidders at the expense of their shareholders. If board classification endows management with leverage in negotiating for private benefits, managerial discretion hypothesis argues that target board classification is affiliated with a lower incidence of explicit bid negotiation, a higher rate of self-dealing by target management in completed transactions, which subsequently leads to lower gains to target