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.”