By Jill Priluck
Last week Fairfax Financial Holdings chief executive officer Prem Watsa insisted that he would not walk away from a BlackBerry deal. "We've never renegotiated," he said. "Over 28 years our reputation is stellar on that front. We just don't do that." Watsa's statement followed a 6 percent loss in share price. The firm was in a tough spot. Reporters covered the market's lack of enthusiasm and the deal looked like it could be a goner.
What Watsa does is anyone's guess. But a new paper in the Journal of Financial Economics that examines the media's role in acquisitions sheds light on the complexities of Watsa's bad press amid falling share prices. Baixiao Liu of Florida State University and John McConnell of Purdue University found that a CEO was more likely to shelve a bad deal if reporting in the New York Times, the Wall Street Journal and Dow Jones News Service was negative, not necessarily because of its merits, but because of its effect on managers. The authors conclude that news reporting can be a force of good in corporate governance, even when managers act in their interest.
Liu and McConnell examined 636 acquisition attempts by 537 firms between 1990 and 2010 valued at more than $100 million. Of the 636 acquisition attempts, 121, or 19 percent, were abandoned. Annual rates were evenly distributed over time and industries. Between 1990 and 1999, 20 percent were abandoned and from 2000 to 2010, 7 percent were. They controlled for stock ownership, companies in heavily-regulated industries, and other variables that might nudge an acquisition toward the trash heap.
Microsoft's attempted acquisition of Yahoo in 2008 might be a case in point, if it weren't so complicated. The software giant's price-per-share fell from almost $32 per share to about $27 per share in the month following the announcement. Yahoo's per-share price dropped from around $29 to $27. Three months after the announcement amid significant media bashing, Microsoft killed the deal. Shareholder angst played a role in its downfall, but so did Jerry Yang's reported insistence on a higher price-per-share. Yang certainly had a lot at stake, reputation-wise. That likely played a role in his hardball tactics and, ultimately, the deal's abandonment. But Steve Ballmer couldn't have had the same concerns about future earnings and hiring prospects.
It might seem painfully obvious: Of course a manager is more likely to kill a deal with bad coverage. After all, most CEOs own shares in their companies. If a stock price falls with little hope for a spike, the CEO surely would have an incentive to cancel it to avoid portfolio losses. But the authors weren't satisfied that the fear of dwindling wealth told the whole story. Using stock market reaction at the time of the acquisition announcement as a proxy for whether a deal was "bad," they wanted to find out why else managers "listen to the market."
Liu and McConnell turned to the news for an answer. They examined articles that mentioned the name of a company in the first 25 words and used the Loughran and McDonald Financial Sentiment Dictionary to identify negative words, such as "adversely" and "disappointing."
Only if a deal received widespread bad press was a CEO more likely to put the kibosh on it. More telling, if a deal had a more negative stock market reaction upon its announcement than another, then the transaction with the more widespread coverage was more likely to be killed, even if the other one performed worse. The authors conclude that managers are more comfortable presiding over broken deals than bad ones because of the effect on a manager's reputation, including future hiring prospects and earnings.
But business news isn't as simple as the authors seem to suggest. Sure, the media controls the conversation and it's difficult to reverse a negative tone, as anyone who's been in the glare of the press knows. And, yes, it's probably true that it's harder for managers who preside over value-reducing positions that everyone has read about to find his or her next gig and get a higher salary. But the authors fail to consider that aside from plunging stock prices, negative stories are often driven by insiders who frame these deals as supposed duds, so the media ends up being a mouthpiece for the managers and directors who want to game these transactions through leaks and tips.
It's also not always the case that abandoning a so-called bad acquisition is good corporate governance. Sometimes it is better to be in the game than not at all, even if the plan is less than perfect. Companies like Google and Facebook know this all too well. And the notion of a "bad" deal is misleading. If the media is a death knell for a deal that led to falling stock prices when it was announced, who's to say the acquisition would have turned out as poorly as everyone predicted? Many supposed game-changing acquisitions end up being bombs; AOL-Time Warner is a large and infamous example. It's still not crystal clear that Google's acquisition of Motorola is a bust, but at the time it was "good" enough that reporters predicted it could be bad for Apple, though this hasn't seemed to be true so far. Remember Yahoo's purchase of GeoCities? Exactly.
Like life, business is filled with unexpected twists and turns that elude even the most ironclad variables. No one is more familiar with this than the executives who run Silicon Valley giants, who acquire with abandon, but don't seem to learn from their mistakes. Of course, there's always the press to remind them.
(Jill Priluck is a former Slate columnist whose writing has appeared in The New Republic, Time.com and The New York Times Magazine, among others. Opinions are her own.)