Author Topic: Why CEO's pay so much for deals?  (Read 3444 times)

yadayada

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Re: Why CEO's pay so much for deals?
« Reply #10 on: December 11, 2013, 03:22:07 AM »
probably because the corporate ladder favours sociopaths.


nestorius

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Re: Why CEO's pay so much for deals?
« Reply #11 on: December 11, 2013, 09:24:21 AM »
I was previously an M&A banker so I have a few thoughts on this.

1. EPS accretion "myth" is the cornerstone of much public company analysis, with the E in EPS often heavily adjusted to remove all "bad" things (non-cash PPA, restructuring, deal expenses, etc.)
2. Non-fundamental "valuation" methods drive price negotiation, e.g. multiples of precedent transactions or even "precedent premia paid".
3. Aggressive forecasts and aggressive synergies forecasts.
4. Investment bankers paid on success fee basis and other consultants generally incentivized to generate future business on integration (management consultants, tax, etc.). Corporate development team needs to justify existence and budget.
5. So many psychological factors that relate to the above... falling in love with the deal "if we don't buy this now we'll never get it" / sunk costs, overoptimism, high self-regard, social proof justification of M&A during hot markets, competitive spirit in auctions / avoidance of "loss", poor incentives (growth, levered metrics), inconsistency avoidance resulting in denial of negative data as diligence goes on and on.
6. Complicit boards.

At the end of the day the CEO needs to be a) comfortable with their job and focused on the long-term, b) experienced in M&A so they can identify the problems and c) incentivized properly or else all of the above factors will encourage action over inaction and delude them. I have honestly heard of several occasions where the company tells the bankers to put away their spreadsheets. M&A suffers many of the same psychological challenges of investing but many multiples worse and limited liquidity to change your mind.

Horrible business so glad I am out.