Corporate Governance and Restructuring Activities Following Completed Bids

• Date: 01 January 2011
• Author: Joshua Abor,Michael Graham,Alfred Yawson
• Published date: 01 January 2011
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00833.x

Corporate Governance and Restructuring

Activities Following Completed Bids

Joshua Abor, Michael Graham, and Alfred Yawson*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: We examine the extent to which effective corporate governance impacts three restructuring

choices following completed acquisitions – signif‌icant adjustment to workforce; sale of subsidiaries; and further acquisi-

tions. We also investigate the relative f‌irm performance in the post-restructuring period for the three respective options

examined.corg_83361..76

Research Findings/Insights: Based on a sample of 649 US f‌irms between the period 1991 and 2009, we f‌ind support for the

assertion that corporate governance impacts layoffs and further acquisitions. We, however, f‌ind no evidence to support a

measurable governance effect on divestiture likelihood. In examining the post-acquisition performance following restruc-

turing, we f‌ind no signif‌icant difference in performance between acquirers that made further acquisitions and those thatdid

not. There is evidence, however, suggesting that acquirers who laid off workers and those that divested assets performed

signif‌icantly poorer relative to a comparable group of acquirers.

Theoretical/Academic Implications: This study adds to the empirical literature on the relation between governance and

restructuring choices. We provide evidence on the impact of governance on restructuring choices that has not been

documented in the academic literature. An implication of this study is that performance in post-restructuring period would

not necessarily be enhanced even when governance exerts positive inf‌luences on restructuring choice.

Practitioner/Policy Implications: Our empirical results demonstrate the relative importance of corporate governance in

organizational strategic choices. This study offers insights to stakeholders interested in enhancing governance structures to

inf‌luence restructuring decisions following completed bids.

Keywords: Corporate Governance, Takeovers, Corporate Restructuring

INTRODUCTION

Mergers and Acquisitions (M&A) are important com-

ponents of the corporate restructuring process. Theo-

retical arguments by Marris (1963) and Manne (1965)

suggest that outside parties take over f‌irms and place them

on a prof‌it-maximizing path when operational ineff‌icien-

cies create a divergence between actual and anticipated

prof‌it maximization. Realizing this goal may, nevertheless,

require restructuring of the merged f‌irm. In support of this

view, Mitchell and Lehn (1990) and Berger and Ofek (1999)

f‌ind that acquirers have the propensity to undertake cor-

porate restructuring post-takeover to ensure the synergistic

objective of the merger is achieved. Failure to successfully

restructure can result in operating problems that can

render the bidder a takeover target. As shown by Mitchell

and Lehn (1990) “bad” bidders, that is companies that

made prior acquisitions that reduced equity value, are

likely to become targets unless they streamline their opera-

tions through restructuring. Further, Cheng, Aerts, and

Jorissen (2010) show that the threat of exchange delisting

induces massive performance enhancing asset restructur-

ing activities.

The corporate restructuringprocess in completed bids can

encompass a broad range of transactions including a

sequence of acquisitions, carve-outs, divestitures, layoffs,

and spin-offs, to develop a new conf‌iguration and corporate

identity (see Baysinger & Hoskisson, 1990; Berger & Ofek,

1999; Mitchell & Lehn, 1990). Prior studies have examined

the value enhancing characteristicsof the alternative restruc-

turing choices (see for instance, Ahn & Denis, 2004; Hanson

& Song, 2006). Other studies have investigated the gover-

nance characteristics of f‌irms in times of corporate reorgani-

zation (see for instance Berger & Ofek, 1999; Chatterjee,

Harrison, & Bergh, 2003; Daley, Mehrotra, & Sivakumar,

*Address for correspondence: Alfred Yawson, Business School, The University of

Adelaide, Adelaide, SA 5005, Australia.E-mail: alfred.yawson@adelaide.edu.au

61

Corporate Governance: An International Review, 2011, 19(1): 61–76

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00833.x

1997). These studies undoubtedly provide important

insights into governance and corporate reorganization.

None of them, however, examines the role of corporate gov-

ernance on the choice of restructuring type following com-

pleted bids. Thus, there is a substantial gap in the literature,

which this paper seeks to f‌ill.

Consequently, the current study is designed to investi-

gate an important testable question: Is the choice of a

restructuring type following completed acquisitions

affected by corporate governance structure? In examining

this question, we focus on three important corporate

restructuring options (signif‌icant adjustment to the work-

force, sale of subsidiaries, and further acquisitions) and

utilize 649 US f‌irms that have completed acquisitions

during the period 1991–2001. Completed acquisitions are

def‌ined as deals where the acquirer holds less than 50 per

cent stake in the target company prior to the takeover and

achieves more than 50 per cent at the takeover completion

date. In effect, our sample only includes acquisitions of

major interest. Our view of corporate governance is an

integrated set of internal and external mechanisms that

harmonize conf‌licts of interest resulting from the separa-

tion of ownership and control. We argue that the relevance

of governance must be ref‌lected in the strategic restructur-

ing choices corporations make post-takeover. We extend

this analysis to explore the impact of the selected restruc-

turing strategy on f‌irm performance in the post-

restructuring period (1996–2009).

Our main contribution to the literature is to show the

importance of corporate governance in strategic restructur-

ing decisions following completed acquisitions. In par-

ticular, the evidence presented shows that governance

inf‌luences the decision to make further acquisitions and

that f‌irms with weak governance are unable to hold on to

the post-merger expanded labor force and resort to down-

sizing. We, however, f‌ind no evidence to support any

governance effect on divestiture likelihood following

completed acquisitions. Our study also contributes new

insights into the literature by examining post-acquisition

performance following restructuring and f‌ind that acquir-

ers who laid off workers and those that divested assets

performed signif‌icantly poorer relative to a comparable

group of acquirers. These f‌indings are somewhat puzzling

as theoretical evidence suggests both layoffs and divesti-

tures are undertaken to improve eff‌iciency, productivity,

and competitiveness. There is, however, no signif‌icant dif-

ference in performance between acquirers that made

further acquisitions and their counterparts that did not

employ this strategy. This f‌inding may be attributed to

hubris on the part of managers that pursue further acqui-

sitions. Overall, our f‌indings provide convincing evidence

that corporate governance exerts measurable inf‌luence on

restructuring choices in completed bids, which to the

best of our knowledge, has not been documented in the

literature.

The rest of the paper is organized as follows: The theoreti-

cal background on corporate governance and restructuring

decisions for completed bids is next presented. Then we

discuss the data construction procedures. Next, we present

the empirical results, and the f‌inal section concludes the

paper.

THEORETICAL BACKGROUND

Agency Theory and Restructuring Choice

The extant literature suggests that the corporate restructur-

ing process is a function of agency problems (Hoskisson &

Turk, 1990; Jensen, 1986; Mitchell & Lehn, 1990). Conse-

quently, measures that affect agency cost impact on restruc-

turing choices. Agency problems mainly arise as a result of

the separation of ownership from control and indicate that

managerial decisions are not aligned with those of share-

holders. This potential divergence of interests has been rec-

ognized in the literature since Berle and Means (1932).

Managers of publicly-held companies are expected to use

the vast corporate resources under their control in the best

interest of shareholders, but their actions are often dictated,

at least partially, by self interests. Evidence of the pursuit of

self-interest is sometimes found in aggressive but unprof‌it-

able acquisition strategy, often referred to as “empire

building” (Chatterjee et al., 2003). When acquisitions are

motivated by the self-serving ambitions of managers, inte-

gration problems soon become evident. This circumstance

coupled with ineffective governance may compromise the

inherent capabilities of the f‌irm to maximize shareholder

wealth. To keep the f‌irm alive as a going concern entity,

strategic decisions would have to be taken. We propose that

effective corporate governance plays a role in the restructur-

ing of the newly combined f‌irm to protect shareholder value.

We begin by relating effective governance to employee

layoffs in the restructuring process in completed bids.

Acquisitions and corporate restructuring often take place

together in the agency theory viewpoint (Gibbs, 1993;

Johnson, 1996). Corporate managers often have personal

incentives to increase the size and scope of the f‌irm beyond

the point that optimizes shareholder value (Jensen & Meck-

ling, 1976; Murphy,1985). This “empire building,” however,

does not necessarily enhance f‌irm value and may necessitate

restructuring. We propose that the board of directors may

intervene and force managers to restructure throughlayoffs.

Specif‌ically, we contend that corporate managers through

board action may be forced to embark on work force reduc-

tion as part of the restructuring of the combined f‌irm. The

idea of employee layoff is to improve eff‌iciency, productiv-

ity, and competitiveness (Freeman & Cameron, 1993) which

may have been lost through the prior “empire building”

process. In this way, layoffs can be seen as an exercise of

effective governance (Johnson, Hoskisson, & Hitt, 1993;

Walsh & Kosnik, 1993) to build corporate value. We contrib-

ute to the corporate governance literature by examining the

role of effective governanceon employee layoffs as a restruc-

turing choice. Empirical evidence on the impact of layoff on

corporate wealth is, however, inconclusive. Krishnan and

Park (2002) provide evidence of adverse impact of layoffs on

post-acquisition performance whilet Bowman and Singh

(1993) and Chen, Mehrotra, Sivakumar, and Yu (2001) f‌ind

positive impact.

Another strategic option in corporate restructuring fol-

lowing completed acquisitions is to dispose of peripheral

assets. In a frictionless market, a f‌irm would choose to divest

assets if the sale price of the assets exceeds their worth as a

going concern. Although divestitures are supposed to add

62 CORPORATE GOVERNANCE

Volume 19 Number 1 January 2011 © 2010 Blackwell Publishing Ltd