Daily Editors' Notes

Latest acquisition target: aging CEOs

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John O'Connor, editorial director, McKnight's Long-Term Care News
John O'Connor, editorial director, McKnight's Long-Term Care News

As capital begins returning to the market, more operators are seeking acquisition opportunities.

So what's the most critical due-diligence document to consider before making a run at a company? Turns out it may be the CEO's birth certificate. If the CEO is 65, you may get a better deal, a new study suggests.

While younger CEOs may be reluctant to sell, those at or near retirement age are less worried about losing career opportunities and future earnings, according to “CEO Preferences and Acquisitions.”

Authors Dirk and Katharina Lewellen combined several databases to examine the relationship between CEO retirement and takeover bids.

They found that when CEOs reach retirement age and have less to lose, they will settle for smaller bids. Their evidence: Takeover premiums — the difference between the estimate of a target firm's value before the deal and the actual purchase price — and stock increases related to the takeover announcement are significantly lower when CEOs are 65 or older.

The authors discovered that that the takeover premium is typically 8 to 10 percentage points lower if the targeted firm is run by a retirement-age CEO. Similarly, the gain in a targeted firm's stock price on the day following a takeover announcement is 10 percentage points lower for companies run by retirement-age CEOs, on average.

Several implications emerge. One is that boards need to be sensitive to the influence that a CEO's age may play on merger and takeover decisions.

Another is this: If you are looking to expand your operations, it's still important to do your homework. Yes, factors such as unit prices, cap rates and the acronyms that get bandied about in MBA programs need to be considered.

But your best investment strategy may be seeking old chief executives with no desire to be buried in their boots.

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Daily Editors' Notes

McKnight's Daily Editor's Notes features commentary on the latest in long-term care news. Entries are written by Editorial Director John O'Connor on Monday and Friday; Staff Writer Tim Mullaney on Tuesday, Editor James M. Berklan on Wednesday and Senior Editor Elizabeth Newman on Thursday.

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