Why Some CFOs Make Better M&A Deals

When chief financial officers have greater influence in the C-suite, companies are far less likely to destroy value by overpaying for acquisitions.

- By Ayse Karaevli and Serden Özcan

Despite the tremendous uncertainty and disruption caused by the persistent COVID-19 pandemic, global M&A volume exceeded $5 trillion for the first time in 2021, with many experts predicting that this current wave is only the beginning of a merger frenzy that could last for several years.1 The abundance of capital and the ever-increasing pressures to grow more quickly, become larger, and digitalize are driving companies to close deals with over-the-top premiums.

Overpriced acquisitions are hardly a new phenomenon: In the past two decades, U.S. public companies have paid, on average, a 36% premium in excess of the prevailing market value of the target company prior to the news of the takeover. But in the current hot market for acquisitions, the risk of overpayment is significantly heightened — and, according to our research, that’s a risk organizations might be able to mitigate by examining and changing power dynamics in the C-suite.

Numerous empirical studies have identified behavioral biases and misalignment between managerial and organizational interests as the main reasons companies overpay for acquisitions.2 In particular, CEOs, who are typically the primary decision makers in acquisitions, are often overconfident about their deal-making prowess.3 They tend to overestimate a target company’s intrinsic value and realized synergies, and underestimate the execution and integration risks. In addition, corporate chiefs might have a personal interest in gaining power, prestige, and additional compensation through acquisitions rather than through other major capital expenditures. In many cases, their decisions are not monitored closely because they have outsize influence on the acquisition process and their companies’ boards.