Senior Citizen CEOs — Age And Acquisitions

2011 SFS Finance Cavalcade at Ross School of Business. Sign design by Stephanie Harden.

Should you pay attention to the age of a CEO?  Perhaps.

Recently, the Ross School of Business hosted, “The 2011, Society for Financial Studies, Finance Cavalcade”, and over 40 papers were presented to the attendees.

Pay Attention to the Age of a CEO?

One of the papers, “CEO Preferences and Acquisitions” (used with permission), by Dirk Jenter (Stanford University and NBER) and Katharina Lewellen (Tuck School at Dartmouth), found:

Mergers frequently force target CEOs to retire early…

…we find strong evidence that target CEO’s preferences affect merger patterns.  The likelihood of receiving a takeover bid increases sharply when a target CEO reaches the common retirement age of 65…

… Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, further indicating that retirement-age CEOs are more willing to accept takeover offers

Basically, Jenter and Lewellen found two key ideas:

1. If a CEO is 65 years (or older), the odds of an acquisition increase.  At the age of 65, there is a ‘kink’ in the odds of an acquisition.
2. The stock returns for an acquisition with a CEO 65 or older, are lower than the stock returns for an acquisition CEO under 65.

CEO Ages from a Quant Perspective

From my quant perspective, this produces an interesting result.  When I screen for stocks, one of the catalysts I hope for – is an acquisition.  Now without doing more quant/qualitative research into a company’s likelihood of acquisition, it might be beneficial to make a screen that says ‘Higher CEO ages are better’.  That is, all other factors being equal, I’ll prefer the company with a 65 year old CEO, over the 50 year old CEO.  Now, my returns might not be as high – but the probability of an acquisition might increase?  Using Google’s Finance page for CEO ages, I looked at the stocks in my Diversified fund and looked at the ages of the CEOs.  Should I weight the stocks with the older CEOs a bit more?  As I think about stereotypes associated with 40 year olds, it would be fascinating to know, are 40 year old CEOs anxious to sell as well?  Some buy a Porsche when they have a midlife crisis, others sell a company?  The oldest CEO in my set was 84 year old, O. Bruton Smith at Sonic Automotive (NYSE:SAH).  Incidentally, the oldest CEO in the paper was 81 years old – could one assume that at the age of 84, a CEO is probably not interested in a merger (as they would have merged long ago)?  Fascinating, in my set of stocks, I had a 65 year old CEO:  William Berkley at W.R. Berkley Corporation (NYSE:WRB).

So when you’re analyzing stocks, should you look at the age of the CEO?  Well, perhaps.  The age of CEOs, poses an interesting question:  What would happen if the target and the acquirer CEOs were both 65 years old?  In my list of companies I have 64 year old, William Klesse from Valero Energy Corp (NYSE:VLO) and 64 year old, James Mulva from ConocoPhillips (NYSE:COP).  Hypothetically speaking, what would happen if Conoco acquired Valero?  Would the odds of a deal increase?  Would the premium be lower?  Or more importantly, would it create tension between two, 65 year olds?

Kai Petainen’s views on the market and stocks are his alone, and do not reflect the views of the Ross School of Business or the University of Michigan.  Kai holds:  SAH, COP, VLO and WRB in his Diversified portfolio; SAH in his Consumer Discretionary portfolio; and COP and VLO are in his Energy/Utility portfolio.  Kai is a MFolio master at Marketocracy and is featured in Matthew Schifrin’s book, The Warren Buffetts Next Door.