Analysis of the Drivers of Board Retention in M&A

ANALYSIS OF THE DRIVERS OF BOARD RETENTION IN M&A

Word count: <19.422>

Michiel Vindevogel Student number: 000150488224

Floris Vlaeminck Student number: 000150246128

Supervisor: Prof. dr. ir. Regine Slagmulder

Master’s Dissertation submitted to obtain the degree of:

Master in Business Economics: Corporate Finance

Academic year: 2018-2019

Deze pagina is niet beschikbaar omdat ze persoonsgegevens bevat. Universiteitsbibliotheek Gent, 2021.

This page is not available because it contains personal information. Ghent University, Library, 2021.

Preface

First of all, we would like to thank our thesis supervisor prof. dr. ir. Slagmulder for being our guide in the process of writing our master dissertation. The high-quality feedback we received as well as the responsiveness has helped us in delivering our thesis.

Secondly, our gratitude goes to Thomas Matthys, postdoctoral researcher at Vlerick Business School, for his helpful suggestions concerning the statistical part of our thesis. Through his input, we were able to verify the correctness of the executed statistical tests.

Last, but not least, we want to thank our family and friends for their time, patience and support throughout the whole process. Thanks to their help in reading and proofreading our thesis, we were able to improve both the language and content of this work.

Table of contents Preface ...... I List of abbreviations ...... V List of tables ...... VI 1 Introduction ...... 1 2 Mergers & Acquisitions ...... 3 2.1 Defining a merger ...... 3 2.2 Defining an acquisition ...... 3 2.3 Reasons for M&A ...... 4 2.3.1 Synergy ...... 4 2.3.2 Market Power ...... 4 2.3.3 Diversification ...... 5 2.3.4 Taxation ...... 5 2.3.5 Cross-selling ...... 5 2.3.6 Expansion of Talent ...... 5 2.3.7 Eat or be eaten ...... 5 2.4 Types of M&A ...... 6 2.4.1 Horizontal M&A ...... 6 2.4.2 Vertical M&A ...... 6 2.4.3 Concentric M&A ...... 6 2.4.4 Conglomerate M&A ...... 7 2.4.5 Hostile M&A ...... 7 2.5 Effectiveness of M&A ...... 10 2.5.1 Implementation Strategy ...... 11 2.5.2 Related or Unrelated Business ...... 12 2.5.3 Friendly or Hostile Acquisitions ...... 12 2.5.4 Culture and M&A Performance ...... 13 3 Board of Directors ...... 14 3.1 Structure of the board ...... 14 3.1.1 One-tier board ...... 14 3.1.2 Two-tier board ...... 15 3.2 Role of the Board ...... 15 3.2.1 Monitoring role ...... 16 3.2.2 Strategic role ...... 17 3.3 Board composition ...... 19 3.3.1 Size ...... 19 3.3.2 Insider/outsider ...... 20 3.3.3 CEO duality ...... 21 3.3.4 Board reputation ...... 23 3.3.5 Stock ownership ...... 23 3.3.6 Board diversity ...... 24 3.4 Public vs private boards ...... 25 3.4.1 Public and private firms in M&A ...... 25 3.4.2 Directors in a public vs private board ...... 26 4 Board within M&A ...... 27

III

4.1 Effective board oversight in the M&A process ...... 28 4.2 Roles a board can take in M&A ...... 29 4.3 Target firm in M&A ...... 30 4.4 Board connections in M&A ...... 31 5 Empirical research ...... 32 5.1 Data ...... 32 5.1.1 Descriptive statistics data sample ...... 36 5.2 Hypotheses and results ...... 44 6 Conclusion ...... 52 7 Bibliography ...... VII Appendix 1: List of Variables ...... XIV

List of abbreviations

BLR: Binary Logistic Regression

CEO: Chief Executive Officer

M&A: Mergers and Acquisitions

R.R.: Retention Ratio

U.S.: United States

USD: United States Dollar

NACD: National Association of Corporate Directors

List of tables

TABLE 1: ACQUISITION DEALS AND DEAL VALUES OF ACQUISITIONS ...... 34 TABLE 2: MERGER DEALS ...... 35 TABLE 3: RETENTION OF DIRECTORS IN ACQUIRING COMPANY AND TARGET COMPANY ...... 37 TABLE 4: GENDER DIVERSITY OF DIRECTORS IN ACQUIRING COMPANY AND TARGET COMPANY ...... 37 TABLE 5: BOARD CONNECTIONS OF DIRECTORS IN ACQUIRING COMPANY AND TARGET COMPANY ...... 37 TABLE 6: INSIDE OR OUTSIDE DIRECTORS IN ACQUIRING COMPANY AND TARGET COMPANY ...... 37 TABLE 7: INDUSTRIES OF ACQUISITION DEALS ...... 38 TABLE 8: RETENTION OF DIRECTORS IN MERGING COMPANIES ...... 40 TABLE 9: GENDER DIVERSITY OF DIRECTORS IN MERGING COMPANIES ...... 40 TABLE 10: BOARD CONNECTIONS OF DIRECTORS IN MERGING COMPANIES ...... 40 TABLE 11: INSIDE OR OUTSIDE DIRECTORS IN MERGING COMPANIES ...... 40 TABLE 12: INDUSTRIES OF MERGING DEALS ...... 41 TABLE 13: BOARD SIZE MEANS FOR ACQUIRING COMPANIES AND NEW COMBINED COMPANIES ...... 42 TABLE 14: RETENTION RATIO MEANS FOR MERGING COMPANIES AND ACQUIRING COMPANIES ...... 43 TABLE 15: RETENTION RATIO MEANS FOR MERGING COMPANIES AND TARGET COMPANIES ...... 43 TABLE 16: R2 OF BLR MODEL FOR DIRECTORS OF ACQUIRING COMPANY ...... 45 TABLE 17: BLR MODEL ACQUIRING COMPANY ...... 46 TABLE 18: R2 OF BLR MODEL FOR DIRECTORS OF TARGET COMPANY ...... 47 TABLE 19: BLR MODEL TARGET COMPANY (1) ...... 47 TABLE 20: R2 OF BLR MODEL FOR DIRECTORS OF MERGING COMPANIES ...... 48 TABLE 21: BLR MODEL MERGING COMPANIES ...... 48 TABLE 22: CROSS TABLE ...... 49 TABLE 23: CHI-SQUARE TEST ...... 49 TABLE 24: R2 OF BLR MODEL FOR IMPORTANCE OF DEAL ...... 51 TABLE 25: BLR MODEL TARGET COMPANY (2) ...... 51

1 Introduction

“Global M&A activity hits new high” (Platt, 2018) was stated as heading of an article in the Financial Times in September 2018. The Belgian financial newspaper “De Tijd” reported in December 2018 that the total value of acquisitions in 2018 was 3.900 billion dollars and that 120 deals had a value of more than 5 billion dollars (Sephiha, 2018). Next to globally rising M&A deals and M&A values, The Institute for Mergers, Acquisitions and Alliances (IMAA) states that cross- border M&A deals are on the rise, as almost 30% of the M&A deals can be considered as cross- border and account for roughly 40% of total M&A value. It is safe to say that M&A have obtained an important position in our global economy. In current literature, M&A has been a trending topic due to the increasing importance of this phenomenon.

There are many reasons why companies involve in M&A. Masulis (2007) defined M&A as the easiest and largest method of investment for companies. Other authors argue that M&A deliver market power, higher market share, financial and operational synergies and diversification (Andrade, Mitchell, & Stafford, 2001; Knoll, 2008). However, research shows that a lot of M&A deals don’t bring the advantages as expected for the involved companies (Christensen, Alton, Rising, & Waldeck, 2011).

A very important aspect of the decision-making process during an M&A deal is the corporate governance of the involved companies. The responsibility for executing this corporate governance in a good manner lays in the hands of the board of directors of the company. As Solomon (2007) states: “A well-functioning and effective board of directors is the Holy Grail sought by every ambitious company”. The board is the highest managerial organ of a company and they are the link between the shareholders and the management which is involved in day-to-day business. The way they execute this role will depend on the individual characteristics of board members and the way they interact. Since the 20th century, the need for a clear distinction between the responsibilities of the management and the board of directors has gained importance. The management can no longer make strategic decisions without involving the board of directors. One of the most important strategic decisions a company can make involves M&A. In M&A, boards need to represent the shareholders the best they can by creating the right strategy to execute M&A. This is done by both being involved in pre-merger analyses as well as overseeing post- merger integration. Take the example of target company boards that have the authority to reject or accept acquisition or merger proposals from other companies. This demonstrates the power the boards have during an M&A deal.

The increasing importance of the M&A landscape and the need for involvement of the board of directors in M&A are the two main drivers for writing this study. Despite the fact that the subject M&A and board of directors is well documented in literature over the years, there is little research that combines these two subjects together. With this paper, we want to contribute to the existing literature on M&A and board of directors by bringing these 2 subjects together in this master thesis. We will focus on the top 60 M&A deals in value over the last 5 years from all over the world. Moreover, we try to explain what the drivers are for board retention in both the acquiring and the target company in an acquisition deal as well as for both companies involved in a merger deal.

This paper is logically built in order to give the reader all the information needed to follow properly. The literature study part consists of three different descriptive sections. First, the landscape of M&A is explained, involving the reasons, types and effectiveness of M&A. Secondly, we explain the structure, role and composition of the board in order to give a clear picture of how the board works and how their members can differ from each other. The board section concludes with a comparison between private and public firms and their boards. Finally, the literature part is concluded by describing the role that the board of directors plays during M&A, the importance of involving the board in the M&A process as well as the roles it can fulfill in that process are described.

In the next part, the empirical study we conducted is explained. The data section clarifies the way we gathered our data and explains our choice for the different drivers of board retention. This is followed by our hypotheses and results, based on the sample data. We test 8 different hypotheses based on relationships we expect from the literature study. Each hypothesis formulated is followed by the result based on the statistical test we conducted.

The last part of this paper involves a general conclusion of our results.

2 Mergers & Acquisitions

Prior to writing an analysis of the board composition in M&A, it is necessary to describe what the M&A landscape looks like. At some point, companies are faced with the question how they can expand their business. Nowadays, worldwide industry consolidation can be observed. As a result of this worldwide globalization and consolidation companies try to gain competitive advantages through synergies which leads to a higher efficiency and, as a result in a better global performance (Tauseef & Nishat, 2014). If they choose to grow organically, they opt for a slower, less expensive process. They can also opt for external growth, through M&A, strategic alliances or joint ventures (Bauer & Matzler, 2014). We see that during the last decades, many companies have decided to opt for external growth through M&A which allows them to react fast to the constant changing business environment (Shah & Arora, 2014). The companies who choose for this external growth through M&A are searching more and more outside their own home country (Delios & Beamish, 2004). In the following sections, both a merger and an acquisition are defined in order to be able to describe their reasons, types and effectiveness in the sections that will follow in the M&A part.

2.1 Defining a merger

A merger between two entities is a business transaction where the ownership of two different entities is consolidated into one entity which results in the consolidation of the assets and liabilities of the two different entities into one entity. As a result, the shareholders of the two different entities are now partial shareholders of the consolidated entity (Piesse, Lee, Lin, & Kuo, 2013). We see that mergers are strongly clustered over time and by industry. Looking at the industry clustering, the percentage of mergers where both parties involved in the transaction are in the same industry only increased over time (Andrade et al., 2001). Since the late 1980’s, deregulation in such a particular industry has been a dominant factor that influences merger activity as nearly half of the merger transactions can be explained by deregulation occurring in an industry (Andrade et al., 2001).

2.2 Defining an acquisition

An acquisition between two entities is a business transaction where one business unit or an entity is purchased by another entity whereby the shareholders of the acquired company sell their shares to the purchasing entity. As a result, shares of purchasing entity do involve two entities now, namely the acquired entity and the purchasing entity (Piesse, Lee, Lin, & Kuo, 2013).

Despite the fact that acquisitions are really popular nowadays, not every stakeholder included in the deal benefits from it. Shareholders of the acquired firm (target firm) usually enjoy positive short-term returns as a result of the premium on the share price the shareholders of the target company receive to sell their shares to the acquiring company. Shareholders of the acquiring firm, however, frequently experience share price underperformance in the months following the acquisition (Agrawal & Jaffe, 2000). Besides the frequently short-term underperformance, the long-term benefits of an acquisition are questionable as well for those shareholders (Agrawal & Jaffe, 2000).

2.3 Reasons for M&A

As one could expect, there are many possible reasons for a company to engage in a merger or acquisition with another company. Since it is important to be aware of the different motives of a company to execute M&A, the following section will describe the main reasons why companies involve in M&A.

2.3.1 Synergy

The most common reason why 2 companies merge or why a company acquires another, is the synergy they will experience when combining business activities (Berkovitch & Narayanan, 1993; Trautwein, 1990). ‘1+1 = 3’ is a common expression when talking about synergies resulting from M&A, where the merging firms or the acquiring firm believes that by combining the business activities of the 2 firms, they will benefit. The benefits resulting from the combination of the 2 business activities exceed the sum of benefits generated by the separate business activities of each firm (Seth, Song, & Pettit, 2000). By engaging in M&A you can achieve operating synergies in production, planning, marketing and compensation systems (Chatterjee, 1986; Lubatkin, 1983), as well as economies of scale which gives you access to more favorable financial terms (Knoll, 2008; Lubatkin,1983, 1987), lower fixed costs and removal of duplicate personnel and departments.

2.3.2 Market Power

By acquiring or merging with another company which operates in the same business as the acquired company you can increase your market power by the combination of the market shares of the 2 companies. Through the combination of two market shares, you can form a monopoly or an oligopoly, if allowed by the market supervisors as we have the antitrust laws which are actively enforced (Andrade et al., 2001).

2.3.3 Diversification

When a company acquires another company with unrelated business activities in comparison to their own business activities, they are able to diversify their operating industries which reduces the impact of a particular industry’s performance on their profitability (Knoll, 2008; Steiner, 1975). As a result of the decrease in systematic risk when you acquire an unrelated business, the cost of debt can be reduced significantly because of the coinsurance effect of the new diversified company. The coinsurance effect results in a higher credit rating and a lower risk of bankruptcy as you have now multiple cashflows from different industries since you are less dependent on one industry (Ross, Westerfield, & Jaffe, 2004).

2.3.4 Taxation

Companies can obtain a tax benefit when they acquire a company with a loss, because losses from the target company can now offset profits from the acquiring company resulting in a lower overall taxable profit (Knoll, 2008; Scott, 1977).

2.3.5 Cross-selling

Companies operating in similar industries but offering different services or products can benefit from an acquisition or merger since clients from the acquired company will become clients of the acquiring company (Chartier, Liu, Raberger, & Silva, 2018). For example, when a bank acquires a stock broker, the bank could sell its banking products to customers of the stock broker, while the clients of the bank can use brokerage accounts from the acquired stock broker.

2.3.6 Expansion of Talent

By acquiring another company, you also acquire the employees of that company and their skillset developed by working for that company. Sometimes companies, who have a lack of certain skills and talents, acquire other companies for the skilled employees of the acquired company (Malette & Goddard, 2018).

2.3.7 Eat or be eaten

The management of a company decides to acquire another company out of fear that they will otherwise lose their power and independence in the case that their firm would be acquired by another firm (Gorton, Kahl, & Rosen, 2009).

2.4 Types of M&A

As there are many strategic reasons behind a merger or an acquisition, we can infer that there are many different types of M&A, depending on the strategic view a company holds. Legal terminology is available to differentiate between several types of M&A and is described in the following sections.

2.4.1 Horizontal M&A

Horizontal M&A happen when a company merges with or acquires another company which offers the same products or services (Ness, 2014). The companies which are involved in these M&A transactions are usually in the same industry and at the same stage of production which could involve direct competition between those companies. This implies that companies are able to eliminate direct competition by using horizontal M&A. As a result of this M&A, the company can increase their market share in their operating industry (Ness, 2014).

2.4.2 Vertical M&A

Vertical M&A occur when a company merges with or acquires another company which is in the same value chain of producing a good or service, but the stage of production of the 2 companies differ (Ness, 2014) . This type of M&A is usually executed to secure supply of essential products needed in a next stage of the value chain as you are able to increase your profit margin by eliminating the margins made by the company you acquired. Another major advantage of this type of M&A is the possibility to restrict supply to your direct competitors or make extra profits by selling goods of an earlier production stage to them (Ness, 2014).

2.4.3 Concentric M&A

Concentric M&A happen when a company merges with or acquires another company which offers products or services to the same customers in a particular industry, however these companies don’t offer the same products or services (Ness, 2014). For example, if a manufacturer of smartphones would acquire a company that manufactures cases for smartphones, this would be termed as a concentric acquisition, since a smartphone and a case for a smartphone are usually purchased together. Due to concentric M&A, selling one of the products or services will also encourage the sale of the other product or service which could result in more revenues. Customers also benefit from concentric M&A as they can now purchase the 2 products together.

2.4.4 Conglomerate M&A

When 2 companies, operating in completely different industries, are involved in an M&A transaction, this is called conglomerate M&A. A conglomerate merger or acquisition usually leads to reduced risk for the combined company because of the diversification effect (Ness, 2014).

However, this diversification effect by carrying out a conglomerate merger or acquisition has been argued, since the acquired risk reduction for the company is not directly beneficial to shareholders as they are able to achieve their own desired level of risk through portfolio diversification (Levy & Sarnat, 1970). Moreover, the call-options pricing model (Black & Scholes, 1973; Galai & Masulis, 1976) states that acquiring projects which increase diversification and as a result lead to a decrease in the variance of the firm’s income distribution could result in a wealth transfer from shareholders to bondholders. Conglomerate mergers or acquisitions could also result from an agency problem occurring between shareholders and managers, since a conglomerate merger or acquisition doesn’t benefit the shareholders but the manager of the company. (Amihud & Lev, 1981). Managers want to reduce their employment risk as a big part of their income is linked with the companies’ performance through profit-sharing schemes, bonuses and stock options. As a result, managers could lose a part of their income and future employment when their company is not performing well. Therefore, some managers will reduce this employment risk by engaging their companies in conglomerate mergers or acquisitions which usually gives the company a stabilized income stream and the managers a stabilized employment income.

2.4.5 Hostile M&A

When one company acquires another company without having the approval or cooperation of the board of directors of the target company and because of their non-approval the acquiring company went directly to the target company’s shareholders, who approved the takeover, this is called hostile M&A (Ruud, Näs, & Tortorici, 2007).

Hostile takeovers are usually performed on the assumption that the management team of the target company is not maximizing the potential of the company and as a result not maximizing shareholder wealth. Usually target companies for hostile takeovers are those companies which are performing suboptimal and still have some upside potential in earnings and share price (Mohlmann, 2012).

A trend we notice, is the decrease of hostile takeovers over time. During the 1990s only 4% of the bids were defined as “hostile” whereas during the 1980s, 14% of the bids could be defined as

“hostile” (Andrade et al., 2001). We also note that the United Stated and the United Kingdom are the main markets where hostile takeovers take place (Martynova & Renneboog, 2008).

Usually the would-be acquirer will issue a tender offer with a share price premium to convince all the shareholders to sell their shares to the would-be acquiring company and consequently capture their voting rights (Sridharan & Reinganum, 1995). Another possibility is trying to buy the necessary stocks of the target company on the stock market without approaching the board of the target company, this is called an unsolicited tender offer. The would-be acquirer can also opt to start a proxy fight. In a proxy fight, the would-be acquiring company tries to convince the shareholders of the target company to vote out their company management and to remove the board members opposing the takeover and install new board members who are in favor of the takeover. Such proxy fights are carried out in order to acquire the target company with less resistance of the current board of directors (Gaughan, 2010).

When the would-be acquiring company tries to acquire the target company, the acquisition only takes place if enough shareholders of the target company agree with the price paid for their shares. Usually the would-be acquirer needs to convince the majority of the shareholders to accept the offer in order to close the deal.

If a would-be acquirer wants to acquire the target company completely, according to the Belgian law (Article 513,§1 & 513,§2 of Belgian Companies’ Code), the would-be acquirer needs to convince the shareholders that hold accumulated in total more than or precisely 95% of the shares outstanding of the target company to sell their shares. Subsequently the acquiring company can start the squeeze-out procedure whereby it can buy without approval of the shareholders the remaining shares from the shareholders who didn’t accept the offer or forgot to respond to the offer. The minimum percentage to fulfill a squeeze-out can differ for each country. For example, in the U.S .(Delaware Code §253) and the UK (Section 979 of the Companies Act 2006) you need to control a least 90% of the shares outstanding whereas in Germany (Articles §327a - §327f of the German Stock Corporation Act), Italy (TUF art. 111 – decreto legislative 58/98) and Belgium, 95% is required.

There are several preventive and reactive defenses available to the management and the board of the target company to protect themselves against a hostile takeover which include the following:

• Stocks with differential rights: This is a preventive defense whereby the target company issued non-voting stocks. As a result, the target company is harder to acquire through a

hostile takeover since it is more difficult for the would-be acquirer to convince the majority of voting-shares to be in favor of the acquisition if the management of the target company holds a large portion of shares with voting power (Tripathi & Maheswari, 2003).

• Employee Stock Ownership Program: Another defense a target company can take preventively is the one whereby employees own a substantial interest in the target company because they are more likely to vote in favor of the management of the target company (Chaplinsky & Niehaus, 1994; Dunn, 1989).

• Crown Jewel: This is a reactive defense against a hostile takeover bid. In a Crown Jewel Defense, the target company will sell off their most valuable and attractive assets to a separate entity or to a friendly third party. By doing this the target company becomes less attractive as a takeover opportunity for the would-be acquirer (Weston & Weaver, 2001). • Poison Pill: Another reactive defense against a hostile takeover bid is the Poison Pill. The Poison Pill occurs if one particular shareholder has pulled the trigger by buying more than a stipulated percentage of the shares of the target company and becomes a danger for a possible hostile takeover. In that case the other shareholders can purchase newly issued shares with a discount. As a result, the target company is less attractive to acquire for the particular shareholder who crossed the percentage limit, because his stake in the company diluted below the stipulated percentage. If he still wants to acquire the target company, he needs to buy more shares than before in order to obtain a controlling interest (Pearce & Jr, 2004; Ruback, 1988).

• Supermajority Amendment: This is another reactive defense against a hostile takeover bid which a target company can use if they added a supermajority amendment in their bylaws or in the company’s charter. This supermajority amendment requires that a substantial majority of the shareholders with voting rights approve the merger or acquisition (Ruback, 1988) . Usually this substantial majority is 67% of the voting interest of the outstanding capital, but in some cases this goes up to 90%. This supermajority amendment makes it much more difficult to perform a hostile takeover (Ruback, 1988).

• Greenmail: This strategy can be used to avoid a hostile takeover but in general this strategy is mainly used by the would-be acquirer to make money easily and fast. If a would-be acquirer commits greenmail, he will buy a significant number of shares of the target company. As a result, the management of the target company feels threatened by the would-be acquirer and will fear a hostile takeover of their company. During greenmail the would-be acquirer offers the target company their own shares with a premium and

they promise the management of the target company to leave them alone if they accept the deal to buy back their own shares with a premium (Pearce & Jr, 2004). In the end of greenmail, the target company uses shareholder money to pay for their ransom and through this the value of their company decreases. The winner of this strategy is the would-be acquirer who runs away with an easy profit. This strategy was really popular in the 1980’s. Nowadays greenmail is prohibited or regulated in a lot of countries involving a 50% cut on profit made from greenmail in the U.S.

• Pac-Man Defense: This reactive defense strategy is a very aggressive and expensive method used by the target company to avoid a hostile takeover. The target company tries to turn the tables around by attempting a hostile takeover of the would-be acquirer by purchasing shares on a large scale of the would-be acquirer until they have a controlling interest (Biryuk, 2019). However, to execute this strategy the target company needs enough money in their war chest to buy a majority of shares of their would-be acquirer.

2.5 Effectiveness of M&A

Even though companies try to make a smart strategic move by executing M&A, and managers are usually convinced about the benefits of M&A, there are plenty of examples where M&A transactions were unsuccessful because skeletons were hidden in the closet. The success of an M&A transaction is determined by pre-merger issues as well as by post-merger issues. Pre-merger issues as strategic complementarity and cultural fit play an important role in the success of M&A. At the other hand post-merger issues as degree of integration and speed of integration influence the success rate of an M&A transaction (Barkema & Schijven, 2008; Bower, 2001; Stahl & Voigt, 2008)

It is well documented in literature that shareholders of the acquiring companies, on average, do not benefit from M&A (Betton, 2008). Approximately only 35-45% of the companies that acquired another company in the UK are able to achieve positive results in 2 or 3 years following their acquisition (Conn, Cosh, Guest, & Hughes, 2001). Although one would assume that people learn from their mistakes and that the acquisition failure rates would decrease over time, empirical data shows the lack of this assumption. The acquisition failure rate is regularly reported to be between 40-60% (Kitching, 1974; Bagchi & Rao, 1992; Bower, 2001) which is close to the one found more recently of 44-45% using a comparable methodology (Schoenberg, 2006). It is even so that some authors argue that the failure rates of M&A fluctuate somewhere between 70 and 90 percent (Christensen et al., 2011).

Besides this, executives of acquiring firms report that only 56% of their acquisitions can be considered successful relative to their objectives set in the beginning of the transaction (Schoenberg, 2006). Executives of the acquired firm that stayed on the board after the merger or acquisition experience a lot of stress resulting from the new culture and practices. As a consequence, on average, almost 70% of the executives leave the company in the five years following the completion (Krug & Aguilera, 2005).

In general, acquiring companies didn’t experience abnormal returns in the following years of their acquisitions. For several of those acquiring companies, the situation went even worse since their abnormal returns showed to be negative in the following years (Agrawal & Jaffe, 2000; Andrade et al., 2001; Moeller, Schlingemann, & Stulz, 2005; Jensen & Ruback, 1983). In literature, many explanations are given for this bad outcome including agency conflicts (Jensen & Meckling, 1976), irrational overbidding due to managerial hubris (Bodt, Cousin, & Roll, 2018; Roll, 1986) and managerial overconfidence (Aktas, De Bodt, Bollaert, & Roll, 2016; Malmedier & Tate, 2005, 2008). Research shows that some firm characteristics also determine why some companies experience abnormal negative returns following an acquisition. Firm characteristics as poor governance (Masulis et al., 2007), compensation policies (Datta, Iskandar-Datta, & Raman, 2001), or excessive free cash flows (Harford, 1999 ; Jensen, 1986 ) allow managers to undertake value-destructive acquisitions.

However, according to a profusion of event studies in the U.S. and Europe which examined stock market reactions of M&A announcements, M&A seem to create the most shareholder value for the shareholders of the target company. (Akben-Selcuk, 2014; Andrade et al., 2001; Bargeron, Schlingemann, Stulz, & Zutter, 2008; Campo & Hernando, 2004, 2006; Frank & Harris, 1989; Goergen & Renneboog, 2004; Jensen & Ruback, 1983; Kuipers, Miller, & A.Patel, 2009; Martynova & Renneboog, 2011; Mulherin & Boone, 2000; Singh & Montgomery, 1987)

2.5.1 Implementation Strategy

The effectiveness and the success of M&A to achieve corporate diversity and growth depends upon extensive planning of this transaction and upon careful implementation of the 2 companies involved in the M&A transaction. (Blake & Mouton, 1984; Jemison & Sitkin, 1986). The implementation strategy which is decided by the acquiring company will depend on the type of M&A and the motive of the M&A transaction. This implementation strategy will determine to which extent these companies will be combined into 1 company or remain separate and the degree to which the employees of those 2 companies will interface with each other (Nahavandi & Malekzadeh, 1988).

2.5.2 Related or Unrelated Business

As already mentioned in the section ‘Types of M&A’, companies can fulfill M&A transactions related with their business activities or unrelated with their own business activities. Both M&A transactions can be effective (Montgomery & Wilson, 1986). However, in general companies that execute M&A transactions in related businesses will outperform those companies which execute M&A transactions in unrelated businesses (Kusewitt, 1985; Rumelt, 1982). The purpose of unrelated M&A is, in general, to achieve financial synergy. In these transactions, there is less need to integrate and combine the operations of the 2 companies (Shrivastava, 1986) and contact between the employees of the companies involved in the M&A transaction is minimal or non- existing. The heyday of those diversification mergers was in the 1960’s but there is evidence that a lot of those diversifications mergers ultimately were failures (Andrade et al., 2001). On the other hand, in related M&A transactions, the acquiring company is more likely to install its own culture and habits to the acquired company. Besides this, extensive interaction between the employees of the 2 firms is more likely in related M&A transactions (Walter, 1985). In related M&A transactions, the acquiring company is already well informed about that specific industry and the products made in that industry, whereby the acquiring company tries to reduce duplication and achieve economies of scale (Shrivastava, 1986). Besides these advantages, the difficulty to achieve operating synergies has to be mentioned. There are big differences in characteristics between the employees of the 2 companies and their willingness to adapt to the culture and values of the acquiring firm can be questioned (Pitts, 1976).

In general, M&A over-and underperformance does not solely depend on the strategic fit of the 2 companies involved. To judge acquisition performance, you should take a closer look at the integration process of every M&A transaction separately, which is a very time-consuming process.

2.5.3 Friendly or Hostile Acquisitions

In the past, the failure to create value after the majority of acquisitions was often linked with hostile acquisitions. Surprisingly, in reality it is just the opposite. Hostile acquisitions create significantly more shareholder value in the 3 years following the acquisitions than friendly acquisitions and white knight acquisitions (Sudarsanam & Mahate, 2006). Besides this, Sudarsanam and Mahate also found that top managers in friendly acquisitions were fired more frequently in the following years than top managers involved in hostile acquisitions. According to Sudarsanam and Mahate this is a result of their lack of value-creation compared to top managers in hostile acquisitions. They agree that the regulations to impede hostile acquisitions should be less strict in order to create more shareholder value.

2.5.4 Culture and M&A Performance

Cultural dynamics between the 2 companies involved in an M&A are another important determinant for effectiveness of M&A, whereby the employees of both companies experience uncertainty and a process of integration in the newly made company after the transaction. A lot of researchers try to explain M&A underperformance as a result of poor culture-fit and lack of cultural compatibility, thus using cultural dynamics. According to a study conducted by Kavanagh & Ashkansay (2006), leadership plays an important role during the integration of the merger or acquisition. It is better to adopt an incremental approach than a direct change method for integrating your merger or acquisition over time.

Besides this, an M&A transaction poses a potential threat for the employees of the 2 companies involved as they experience problems with their social identity during the M&A integration process (Gertsen & Soderberg, 1998). Employees with high level of social identification with their company’s identity perform better, increase their work effort and frequently have better positive organizational citizenship behavior. A company where employees have this higher social identity benefit from this, because they experience less staff turnover (Haslam & Ellemers, 2005).

Two empirical studies investigating the potential antecedents of post-merger identification have been performed (Bartels, Douwes, Jong, & Pruyn, 2006; Dick, Ullrich, & Tissington, 2006). Both studies used a wide set of variables to explain post-merger identification with the combined company including pre-merger identification with the company, perceived utility and sense of continuity of the M&A transaction. Even though the data was collected in different organizations (Police and Hospital) and 2 different countries (The Netherlands and Germany) they both found the same results of pre-merger identification as predictor of post-merger identification.

However, studies about the relationship between cultural fit and performance after the M&A transaction have produced mixed and contradictory results (Cartright, 2005; Schoenberg, 2000).

3 Board of Directors

The board of directors is considered the highest decision-making organ within any organization and is responsible for both the strategy as well as the monitoring of the organization (Deloitte, 2019). They protect the shareholders’ assets while ensuring that the shareholders receive a decent return on their investments (Shleifer & Vishny, 1997) and they protect the employees’ interests and rights in a socially responsible way (Solomon, 2007). Protecting the shareholders is in their own interest, since they are in charge of electing the board of directors for multiple-year terms. It is the highest internal control mechanism responsible for taking decisions about the top management and for monitoring their actions.

In general, the board makes decisions and gives its approval for actions concerning different parts of the company. Corporate governance can be seen as a web of relationships, not only between the company and its owners, but also between the company and other stakeholders (employees, customers, suppliers etc…) (Solomon, 2007). The board has oversight of decisions regarding the vision and mission, the values to be promoted, the company goals and the company policies. On top of that they are responsible for overseeing the strategy and decisions made by the management on the structure of the company. This is done by communicating with the management and with the goal of serving relevant stakeholders’ interests (Solomon, 2007). In exchange for their services, the members of the board receive a yearly paid fee and an additional compensation for every meeting they attend.

3.1 Structure of the board

Looking at differences in board structure, 2 main types occur: one-tier board (known as unitary board) and two-tier board (known as dual board). Exceptionally, boards can have more layers, referring to the situation of Japan (Solomon, 2007). The reason for these different board structures lays in the fact that companies around the world operate in different business contexts with different legal structures (Dehaene, De Vuyst, & Ooghe, 2001). For the consistency of this research, only one-tier boards will be included in the dataset, since comparing one-tier boards with two-tier boards would lead to misleading results. In the following, the difference between the two is shortly explained.

3.1.1 One-tier board

A one-tier board is a unitary board system, where both insiders (executive directors) and outsiders (non-executive directors) can be found. Both types of directors are thus gathered in one unified group (Jungmann, 2006). In these boards, it is allowed to be both chairman of the board and CEO

of the company (Anand, 2008). This is called CEO duality and will be further discussed in the section on ‘Board Composition’.

Geographically, this board structure is mostly found in countries with the Anglo-Saxon style of corporate governance (Solomon, 2007). Examples of such countries include the United States and Canada but also European countries such as the United Kingdom, Belgium, Sweden, Spain, Portugal and Greece. The one-tier model is also referred to as the British system of corporate control, while the two-tier model is called the German system of control (Jungmann, 2006).

3.1.2 Two-tier board

In this German system of control, it is mandatory for all corporations to have two boards (dual board): the management board and the supervisory board (Jungmann, 2006). It is prohibited to be both a member of the management board and the supervisory board at the same time. While in a one-tier board both executive directors and non-executive directors are working alongside in one board, they are now split between respectively the management and the supervisory board (Jungmann, 2006). The main tasks of the supervisory board are the appointment and dismissal of management board members and monitoring their actions. They even have the right to initiate court actions against management board members if needed (Jungmann, 2006). The responsibility of managing the company’s affairs and setting up long term goals and guidelines, referred to as management issues, are exclusively held for the management board (Jungmann, 2006). In contrast to one-tier boards, in this system it is not allowed to be both chairman of the board and CEO of the company. The chairman will have a seat in the supervisory board (Solomon, 2007).

Geographically, this dual board structure is mostly found in Continental Europe (Tricker, 1994). This refers to countries such as Germany, Denmark, Austria, Czech Republic, Slovakia, Latvia, Bulgaria and Switzerland.

3.2 Role of the Board

Nowadays, more than ever, boards are held responsible for the results of an organization. Even though they are not concerned with running the daily operations of the company in se, they are responsible for giving the right direction to the company in doing business, while overseeing management actions (Tricker, 1994). An effective board of directors is the Holy Grail searched by every company that wants to be successful (Solomon, 2007). However, corporate corruption, remuneration excess, inadequate disclosure of financial results etc. have affected trust in

markets. These events forced the board of directors into more disciplined and publicly responsible corporate behavior and have highlighted the shortcomings of the board of directors. Addressing those shortcomings can be beneficial for both the company as the society in general (Anand, 2008). This has led to the introduction of a legislative response in the form of the ‘Sarbanes-Oxley Act’. The aim of SOX compliance was to protect shareholders and the general public from accounting errors and fraudulent practices in enterprises, and to improve the accuracy of corporate disclosures (Lord, 2019). Compliance with SOX has led to a more regulated role of the board. In the following, we will discuss both the monitoring and strategic role a board can play in a company. Since the monitoring role is historically the most common one, this role is discussed first.

3.2.1 Monitoring role

The monitoring role of the board includes hiring and directing managers (especially the CEO), taking decisions on which responsibilities and authorities will be delegated to the management and monitoring their performance, communicating with owners and monitoring policies (Pearce & Zahra, 1991). This delegation process of responsibilities is performed to ensure conformance to policies, identify conflicts and solve them and assure that the board is in control of the situation so as to avoid any conflicts between the board and the management, while overseeing the day- to-day operations (Demb & Neubauer, 1990). This monitoring role cannot be exercised in the same way and to the same extent in every organization, since they differ in size and in the kind of information that needs to be monitored (Van den Berghe & Baelden, 2005). Therefore, every board should develop its own monitoring role, adapted to their needs. Boards of directors are strictly evaluated on taking decisions about this role since the importance of this role is related to the number of tasks a board delegates to the management. The more responsibilities a board delegates, the broader the scope of its monitoring role. The less it delegates, the less broad its monitoring role will be (Van den Berghe & Baelden, 2005).

Fama & Jensen (1983) have identified four steps the board has to take in the delegation process: 1. Initiation: the generation of proposals for resource utilization and structuring of contracts 2. Ratification: the choice of the decision initiatives to be implemented 3. Implementation: execution of the ratified decisions 4. Monitoring: measurement of the performance of decision agents and implementation of rewards.

This delegation process of responsibilities can lead to agency problems, since separation of ownership and control creates opportunities for management because they are not fully

responsible for the wealth effects of their decisions (Fama & Jensen, 1983; Solomon, 2007). The residual claimants and equity holders carry the risk of these decisions (Bathala & Rao, 1995). Fama & Jensen (1983) discuss the role of market and organizational mechanisms in reducing agency conflicts. As mentioned before, the board is elected by the shareholders to oversee top management decisions. While the board has delegated certain responsibilities to the management, it does keep control and has the authority to monitor the results and give appropriate compensation. Thus, separating the management and control aspects of the decision-making process keeps the chance that an agent will act in his self-interest over the firm’s interests as low as possible, since the agent is being ‘watched’ by the owner (Tosi, Brownlee, Silva, & Katz, 2003).

The monitoring role of the board can also have a financial character. While managing the day-to- day finances is the responsibility of the senior management, it is important to notice that the board has the ultimate responsibility of overseeing the organization’s financial affairs which includes financial planning, financial controls and financial reporting (NCVO Knowhow, 2018). First, financial planning includes the agreement on a budget that should include the expenditures the company expects to make and the income they expect to raise (NCVO Knowhow, 2018). This annual budget is necessary to be able to monitor your cash flow and to avoid insolvency. Next to this short-term budget, it is also necessary to add a long-term plan for financial stability. Second, financial controls are necessary to avoid the misuse and spilling of the company’s money (NCVO Knowhow, 2018). This can be exercised by the use of a full financial handbook. Third, the board is also responsible for reporting the financial information of the company to the public and therefore needs correct financial information to fully understand the financial situation of the company (NCVO Knowhow, 2018). These three responsibilities are described as the duty of financial oversight. The foundation of an effective financial oversight of the company is the composition of the board (D.C. Bar Pro Bono Center, 2014). Board size for example can influence the degree to which a board member feels involved and responsible for oversight of the financial affairs. Differences in board independence can result in personal interests that differ from the sake of the company. For example, if an independent board member supplies goods or services to the company, there is a risk that that member may be awarded a contract on terms more favorable than terms negotiated with an unaffiliated third party (D.C. Bar Pro Bono Center, 2014). We will discuss these and other differences in board composition more deeply in a further section.

3.2.2 Strategic role

Because of the existence of control mechanisms on the board and the media attention they often get, the question about the board’s involvement in the strategy of the organization and how they

will successfully fulfil this responsibility raises. A board which has had full involvement in the strategy process has much greater ability to play an important role in top management succession than one which has been kept at greater distance (Demb & Neubauer, 1990). The debate about the role of board of directors has been framed by alternative characterizations of boards. Literature tends to disagree on the nature of these alternative characterizations, going from approving management decisions automatically without proper consideration to working closely together with the management in taking decisions (Solomon, 2007). These can be divided into two broad schools of thought, referred to as the ‘passive’ and ‘active’ school (Golden & Zajac, 2001). The first one sees boards as a tool of top management whose only concern is satisfying the requirements of company law. This school argues that the board is dependent on the management and their decisions are subject to management control, more specifically the CEO. In contrast, the second school defines the board as an independent mechanism which is actively involved in the decision-making process and shapes the strategic direction of the organization. However, to perform their duties and responsibilities in this active involvement effectively, board members need to possess significant business, organizational and community leadership skills. Historically, there has been a switch from the passive school of the 1970’s and 1980’s to the active school starting from the 21st century.

We can further elaborate on these two broad schools by involving them in 4 ways of theoretical thinking in the context of the boards’ strategic role (Hendry & Kiel, 2004):

Managerial hegemony theory argues that boards are a legal fiction dominated by the top management and thus supports the passive way of thinking.

Agency theory explains the relationship between principals and agents in the business, where the principal delegates work to the agent. The possibility of unaligned interests and different aversion levels to risk in this relationship can lead to opportunistic behaviour of the agents (Fama & Jensen, 1983). In this theory, the boards’ role is to minimize potential divergence between the shareholders and the management and thus reduce agency costs. This implicates the existence of a monitoring and controlling role of the board, thus an active involvement.

Stewardship theory argues against the possible opportunistic behaviour as described in the agency theory and focuses more on managers’ behaviour. While agency theory assumes agents need to be monitored to act in the best interest of the principal, stewardship theory conversely assumes agents do not need this monitoring to act properly, because they seek to attain the objectives of the organization (Davis, Schoorman, & Donaldson, 1997). This theory supports the

active school, arguing that the strategic role of the board contributes to its overall stewardship of the company (Stiles, 2002).

In the resource dependence theory, the board can be seen as a strategic resource. Given that all organizations depend on others to survive and thrive, this theory suggests that managing external relationships with other organizations can positively affect the behavior and the results of the firm. Mintzberg called the board the mediator between internal and external coalitions and sees managing these relationships as the prime purpose of the board.

These different views on and theories about the strategic role of the board within an organization has led to three different levels of involvement in strategy. Mcnulty & Pettigrew (1999) define these levels of involvement as (1) taking strategic decisions at the end of the decision-making process, (2) shaping strategic decisions at the beginning of the decision-making process and (3) shaping the context, conduct and content of strategy. The last one is seen as a continuous process of influence and as the highest level of strategic involvement. This high involvement is necessary, since the board as a whole should be engaged in discussing, reviewing and approving a strategic plan, a written document setting out the organization’s strategy (Deazeley, 2009)

3.3 Board composition

Being an effective working board, which refers at doing the things right, depends on being successful at monitoring the company (Anand, 2008) as well as the determinants of board composition (Bange & Mazzeo, 2004). The composition of the board of directors can differ in many ways. Differences can occur in size, insider/outsider, CEO duality, stock ownership, reputation and experience (Xie, Cai, Lu, Liu, & Takumi, 2009). The first four characteristics (board size, independence, CEO duality and stock ownership) have been identified by Fooladi & Shukor (2012) as having an impact on firm performance and thus the effectiveness of the board. In what follows, these differences and board diversity will be further discussed to give a clearer picture of how the board and its members can differ. These differences in composition of the board will be important to understand the movements in the board after M&A and some of them will be taken into account as variables to examine board retention.

3.3.1 Size

Differences in size can occur and lead to either a slower or faster decision-making process due to high coordination costs and free rider problems (Boyd, 1990). First of all, it is important to mention that there is no optimal size of a board of directors. According to the Corporate Library's study, the average board size is 9.2 members, and most boards range from 3 to 31 members,

dependent on the company. To be able to evolve to the perfect board size for a specific company, boards face an optimization process: the board must be large enough to provide the knowledge and resources needed by the company, but it must remain small enough to act in an efficient way (Boyd, 1990). It is clear that larger boards will have a higher skill level and a wider array of knowledge (Anand, 2008), while smaller boards will have less communication problems and better oversight of managers (Yermack, 1996). Raheja (2005) shows that optimal board size and composition are functions of the directors' and the firm's characteristics and illustrates how optimal board structure and board effectiveness vary with these characteristics. The developed model shows that a move towards an optimal board structure can improve firm performance. This shows the correlation between board size and firm performance, which stresses the importance of reflecting well and deciding properly on that matter.

Kenneth, Sukesh, & Mengxin (2009) mention two characteristics of firms that are likely to affect the optimal size of boards: firm size and growth opportunities. They expect a direct relationship between the size of the firm and the size of the board and an indirect relationship between growth opportunities and board size. Both of these relationships can be expected. Xie et al., (2009) expects that firms with smaller boards are more likely to make value-maximizing decisions, referring to the M&A context, thus the approval or denial of a takeover bid. Whether merged companies kept, increased or decreased the number of board members should be taken into account when looking at post-merger boards. A direct relationship between firm size and board size can be expected since large firms are engaged in a higher volume of activities that show more diversity than smaller firms (Kenneth et al., 2009).

3.3.2 Insider/outsider

The most important difference between members of the board is their function within the company, referring to whether they are an insider or an outsider. This difference is an important element in the retention of a board member after a merger or an acquisition (Xie et al., 2009). Inside directors, also called executive directors, are experienced members who are both member of the board and executive of the company and thus know the company well and act in the interest of major stakeholders, officers and employees (Goodstein, Gautam, & Boeker, 1994). Their experience is mostly due to the role they execute within the management and their involvement in the daily operations of the company (Plessis, Großfeld, Saenger, & Sandrock, 2012). Therein lies the main difference with outside directors, also called non-executive directors (Adams, Hermalin, & Weisbach, 2010). They do not fulfill a role within the management of the company and as a consequence are not involved in the day-to-day activities of the company (Goodstein et al., 1994). They are independent from the company, fulfill a supervisory role within the board and get an additional pay for attending the meeting, whereas this is included in the job description of

an inside director. Their independence can provide the company with an objective view on future decisions and goals, increase objective monitoring of management and reduce conflicts of interest (Fama & Jensen, 1983).

It has to be mentioned that although a more independent board normally goes hand in hand with a higher number of outside directors in the board, the independence of those outside directors may be questioned in some specific circumstances (Adams et al., 2010). In most of the cases, independency of the board and being an outside director are linked to each other, however it is possible that there exist a ‘grey area’ on this topic. Outside directors that were previously employed in the company or are representatives of certain stakeholder groups cannot be seen as entirely independent (Tricker, 1994).

To make reasoned decisions, the attendance of both insiders and outsiders is important, since this gives you a well-balanced base (Solomon, 2007; Tricker, 1994). The relative number of insiders and outsiders on the board is less relevant than the method by which these groups achieve a balance of power. One board, for example, needs six capable outsiders to balance eight insiders while another board needs more outsiders than insiders on the board to provide equal power (Rowe & Rankin, 2002). This balance is shown in the situation of a disciplinary takeover (Kini, Kracaw, & Mian, 1995). The author found that after the takeover, for insider dominated targets, the number of inside directorships decreases while the number of outside directorships remains about the same. On the other hand, for outside-dominated boards, the number of inside directorships increases while the number of outside directorships decreases. This shows the process of going to a more well-balanced board after a takeover.

Kenneth et al., (2009) stated two hypotheses regarding the determinants of board independency based on firm size and growth opportunities, also used as characteristics of board size. They expect a direct relationship between board independence and firm size and an inverse relationship between independency and growth opportunities. Board size and independency are related. As Raheja (2005) states: “firms where the incentives of insiders are better aligned with shareholders require smaller size boards.” This shows that the different components of a board are aligned with each other and that choices have to be made taking into account all the elements.

3.3.3 CEO duality

CEO duality refers to a situation in the board where the CEO of the company also holds the position of chairman of the board (Tang, 2017). The chairman is responsible for the leadership of

the board. That leadership function can vary from deep involvement and exercising substantial influence to only chairing the board meetings (Tricker, 1994). There are two schools of thought, each presenting their theoretical arguments: agency theory and stewardship theory (McGrath, 2009).

As already mentioned in the section about the roles of the board, the agency theory is built on the possibility of unaligned interests because of the relationship between principals and agents (Fama & Jensen, 1983). This theory states that if one single officer holds the position of both CEO and chairman, there is an unavoidable conflict of interests that could negatively affect the interests of the stakeholders. Both the position of CEO and the ability to direct board meetings can lead to acts of self-interest, since there isn’t a separate chairman to protect the shareholders’ rights. Therefore, they argue that these positions should be exercised separately (McGrath, 2009). On the other hand, there is the stewardship theory which argues that both the position of CEO and chairman should be exercised by the same officer, since this will allow an officer to work more effectively and efficiently referring to faster decision-making and the elimination of potential conflicts between the CEO and chairman (McGrath, 2009; Solomon, 2007). This dual role will also create more unity and certainty within a company, more specifically between managers and the board. Important to mention is the difference between the occurrence of CEO duality in the United States and in Europe. In the U.S., most of the big company CEO’s also serve on the board as chairman. Approximately 80% of the big corporations in the U.S. use this system, while CEO duality in some cases in Europe is not permitted or just not very common (Huse, 2007). However, since CEO duality is allowed in one-tier boards, this will not create problems in our data sample.

Researchers have found both benefits and downfalls of a CEO duality in a board. When referring to the benefits, the main advantage consists of enhancing the unity of command at the top management which helps to ensure the existence of strong leadership (Finkelstein & D'Aveni, 1994). Overall, researchers see more downfalls than benefits from CEO duality. Brickley, Coles, & Jarrell (1997) and Goyal & Park (2002) argue that the combination of both a decision management and decision control role in one individual can reduce the effectiveness of a board in its monitoring role because of the lack of independent leadership. This lack of independent leadership can lead to a situation in which it is extremely difficult for the board to respond early to failure in its top management team. Just taking into account the difficulty of removing a poor performing CEO with this dual role, this argument is understandable.

In conclusion, CEO duality can be seen as a double-edged sword, with agency and organizational theories giving different insights on this topic.

3.3.4 Board reputation

Historically, boards have operated behind closed doors, separated from the outside world (Suvanto, 2018). One would expect that consequently the reputation of a board should not matter and not influence the choice of new board members. More recently, the reputation of a board and its members has gained more attention and should be taken into account when evaluating and defining a board (Suvanto, 2018). In times of corporate troubles or distress, the board is coming to the attention of the public. The decisions that the board makes at that moment can result in well or badly affected reputation. A board can increase its reputation and quality of decision making by attracting directors who also have directorships in other companies since this indicates more experience, ability and accomplishment (Suvanto, 2018).

Ferris, Jagannathan, & Pritchard (2003) stated that directors who serve in larger firms and sit on larger boards are more likely to attract additional directorships. Mallin & Michelon (2011) results show that board reputation plays a role in driving corporate social performance in the companies that are the U.S. Best Corporate Citizens over the period 2005-2007. They link the proportion of independent directors and CEO duality to the corporate social performance. These results of the authors again show the importance of taking into account all the differences within a board and their collinearity. The authors also conclude that there is a reputation effect in the market for directors. Having a high reputation can thus lead to more quality boards and consequently to better decision making in potential M&A.

Recent research of Edelman (2018) has shown the importance of having a good board reputation for attracting investors. He surveyed investors with assets under management of over 1 trillion dollars. After this survey, he came to the conclusion that two thirds of the respondents had stated that “they must trust a company’s board of directors before making or recommending an investment.” Also, mutual funds and index funds (large institutional investors) are keeping a board’s reputation in mind when making decisions about whether they will invest in the company or not. Beyond investors, also other stakeholders are interested in the daily operations of the board. Think about federal regulators, labor unions and the media. We can state that if a board is known as a strong steward during periods of uncertainty, this can in fact become a competitive advantage for the company in the long-term (Edelman, 2018).

3.3.5 Stock ownership

Within a board of directors, it is possible that members of the board are either shareholders or non-shareholders. A director of the board can either own stock grants, which represents an ownership interest in a company, or not own them. Stock ownership can be an incentive for

directors, since the success of a firm is reflected in its stocks and thus in their own wealth (Rose, Mazza, Norman, & Rose, 2013). It promotes a long-term perspective in managing the enterprise and an incentive to further align the interests of directors with the interests of stockholders. These directors are bound by certain laws when participating in the board and simultaneously owning stocks. The duty of loyalty is of particular concern when discussing stock ownership (Lawrence, 2017). This involves the responsibility of directors to always act in the best interest of the company and its shareholders. This duty can be breached when a director owns stocks in a competing business, since this has an influence on the decisions he will make for the company where he is a member of the board (Lawrence, 2017).

In the last decade, it has become more popular to rely wholly or partly on stock-based forms of payment for board members, since firms with ownership requirements can show better performance and results after the year of implementation (Cosh, Guest, & Hughes, 2006). This trend had led to more discussion about the impact that stock ownership has on boards’ independence and objectivity. Rose et al., (2013) state that the temptation of shareholding directors to engage in efforts that could boost the company’s stock price for own interests can be decreased by increasing the transparency of board behavior. Again, the interaction of all the different parts of the composition of the board is obvious, since increasing transparency could have consequences for a boards’ reputation. More transparency means a more open communication with analysts, investors and the public. This could lead to positive and negative impacts on a company’s reputation. The fact that all elements within the board’s composition are related is also a topic in other literature regarding stock ownership. Booth, Cornett, & Tehranian (2002) find that, in general, the percentage of outside directors is negatively related to insider stock ownership. CEO duality is, however, less likely when insider stock ownership increases.

3.3.6 Board diversity

Board diversity is defined as the extent to which the board’s demographic diversity as measured by the culture, nationality, gender and experience of its directors complements its statutory diversity. This diversity could lead to a more effective working board in order to contribute to organizational learning and improved management strategic decision making (Ben-Amar, Francoeur, Hafsi, & Labelle, 2013). A positive relationship between board diversity and firm performance can be expected, especially in situations of complex decisions, which involves M&A decisions. The effectiveness in the oversight function of boards of directors in a company is also associated with more diversity within the board (Erhardt, Werbel, & Shrader, 2003; Solomon, 2007).

It is important to make the distinction between the observable (demographic: gender, age, nationality) and the non-observable (cognitive: knowledge, education, values, perception) characteristics. It is clear that the non-observable characteristics are more difficult to measure and are mostly not focused on when examining board diversity (Erhardt et al., 2003). Recently, more gender equality in boards is a rising topic. To give a general idea, women currently hold 19 percent of board positions in the U.S., while in European countries such as France, Norway, and Sweden they hold more than 30 percent (Huber & O’Rourke, 2017). Looking at the S&P 500, a stock market index that tracks the stocks of 500 large-cap U.S. companies, female representation on those boards has increased on average by 24 percentage points since 2005 (Huber & O’Rourke, 2017).

3.4 Public vs private boards

When launching a new business, choosing the legal structure of your company is the most important decision that has to be made, since this defines how the owners will interact and how their decisions are affected by these interactions (Hamel, 2018). This decision-making process can differ substantially between a company that is privately owned and a publicly traded company. When a business launches, it is normally privately owned, which means that the company is owned by a relatively small number of shareholders with shares of the company held and traded without using an exchange market and without involving the public. When a company grows and wants to raise capital, it can decide to go public by selling its shares on an exchange market resulting in a dispersed ownership of the company among the general public (Murray, 2018).

It is clear that being a private company or public and listed company will result in big differences between companies, and consequently big differences between their boards of directors and the process of their M&A deals. In the following, their M&A process is briefly explained as well as their board differences. The choice to use data of publicly traded companies in the sample used for testing the hypotheses will be based on these differences.

3.4.1 Public and private firms in M&A

While the ‘mega-mergers’ between the publicly-traded companies are the most remarkable and visible mergers and acquisitions in the market, many acquired firms are privately held or family controlled (Li & Aguilera, 2008). Take the example of a young, entrepreneurial firm that has to rely upon venture capital to survive. If these firms show great growth potential, they become the perfect target for an acquirer firm. Private firms can be acquired only with the owner’s consent. Many private firms often have more effective monitoring devices than public firms because

owners assume management roles that align their interest with those of the owners (Li & Aguilera, 2008).

Talking about the process of the deal, private company sales are more likely to turn into extended auction processes, which means that the selling price is automatically discovered during open competitive bidding, whereas public companies require more discretion (DeChesare, 2012). Looking at the structure of the deal, stock purchases are more common with public companies, while in private companies this is the case for asset purchases (DeChesare, 2012). Lastly, the difference in valuation has to be mentioned. When investing in a privately held company, one cannot easily rely on the stock price to determine the company value. Public companies, however, are obliged to disclose financial statements, which makes it easier for investors to find out how these companies perform and what their value is (DeChesare, 2012). Private companies don’t have the obligation to provide financial information to the public and face less demand for high- quality financial information, so their financial health is more difficult to determine (Chen, Hope, Li, & Wang, 2011).

3.4.2 Directors in a public vs private board

As already mentioned above, the differences between public and private companies are linked to the differences between their boards. Regardless of the type of board, all board directors are liable for their decisions and actions. However, the board of directors of a publicly traded company sustains a higher degree of liability than private company boards, since corporate governance standards have increased with the introduction of the SOX in 2002 which requires a publicly traded corporation to openly disclose their relationships (Price, 2017). These higher standards result in the need of a better understanding of all the audit and financial reports and the accountability of the board for these reports. The quality of these reports results in a positive or negative evaluation from investment advisory services, that grade corporations using a scorecard, which impacts the level of investor attractiveness (Chen et al., 2011). Young, private companies are normally expected to meet the parameters of this scorecard, while the more regulated and complex setting of public companies makes this more difficult for the company and thus for their board. Public company boards also operate in a different type of ownership. In these companies, typically thousands of shareholders are involved (Price, 2017). This influences public board decisions, which must be more risk-averse than some of the smaller decisions private boards have to make.

When it comes to the role a board plays in private and public companies, there can be some differences between the two. The main difference between the two is that anyone can become a shareholder in a public corporation and gain a say in business decisions and involvement in the

appointment of the board, while private companies have more control over the division of their ownership (Capron & Shen, 2007). Another major difference concerns takeovers. Since a public company trades its stocks on an exchange market, available to the general public, it is subject to takeovers. One party can buy more than 50% of the shares and gain power over the election of the board and management decisions (Hamel, 2018).

Since private companies often come in the form of a family-owned business, this can have an influence on the board’s role. Take the example where the CEO of the company is also a major stakeholder. In this situation, the board will tend to exercise a more advisory role than a monitoring and strategic role (Zuehlke, 2018).

Another major difference is the need for information disclosure of the company. Since a public company has to show more transparency and has a larger number of requirements concerning financial reporting, the quality of their disclosure needs more attention. Looking at private companies, it is not necessary to disclose financial information to the public (Chen et al., 2011). In contrast, public companies are required to make quarterly financial statements available to the public (Zuehlke, 2018).

While explaining these differences between public and private boards and their M&A process, it becomes clear that it is much more difficult to gather data on private boards (Capron & Shen, 2007). The smaller boards together with the lack of transparency in information disclosure, makes it more labor-intensive and time-consuming to collect correct data that are credible and complete. Because of this, we will focus on M&A deals that are completed in the context of publicly traded companies.

4 Board within M&A

During the M&A process between a target firm and an acquirer firm, the movement within and the fuse between the two boards involved in the M&A should be examined. It is impossible to completely keep the two boards and fuse them in one board, since this would harm efficiency and effectivity. Consequently, literature on corporate governance shows the possible board seat loss that directors of target firms and acquirer firms face after an M&A (Xie et al., 2009). The role and destiny of these boards in the M&A process are therefore questioned. The board of directors plays an important role within an M&A (Bhagat & Huyett, 2013). Poorly executed M&A can saddle investors with weak returns on capital for decades, but deep board involvement can avoid that. This involvement is so important since directors are in the perfect place to help the senior executives to gain from M&A and work as an alternative control mechanism to guide top

management (Protiviti, 2016). The multiple insights of different board members with long leadership careers in different companies can shed useful light on certain problems and risks that can occur during deals (Lajoux, 2015).

4.1 Effective board oversight in the M&A process

In 2016, Protiviti, a global consulting organization, and National Association of Corporate Directors (NACD) brought together more than 60 directors from different globally active firms to discuss current challenges and effective practices of the board of directors in M&A oversight. The different insights of the directors together with the knowledge and experience of Protiviti, gained by serving their clients in M&A, evolved in 10 key points that are important when a board is involved in the M&A process (Protiviti, 2016): · Link M&A possibilities to the growth strategy of the firm · M&A is an end-to-end cycle, not just a transaction · Determine the involvement of the board needed in a phase of the process · Be aware that critical competencies are needed to execute the full process · Be critical about the deal assumptions and expected synergies · Manage emotional investment of senior management to guarantee an objective view on the deal · Give sufficient attention to the need for due diligence by involving the management · Have full knowledge about the integration plan · Stay on top of the integration process · Always look back to improve the process · These key points are linked to the three roles, described in the next section, a board can fulfill during the process, described by Bhagat & Huyett (2013).

Even if your board is not currently considering an M&A transaction, it is important to remain aware of M&A as a strategic potential for the company. To raise this awareness, some questions may be considered by the board of directors when they are involved throughout the process. If they are able to give a meaningful answer to these questions, it will be interesting for the company to involve the board since the board is aware of their role throughout the process (Protiviti, 2016); · Does the board understand how M&A supports the company’s growth strategy, and does it undertake an end-to-end view of its M&A oversight? · Are directors satisfied that they are involved sufficiently in advising management on complex and risky M&A transactions?

· When M&A targets are brought before the board, do directors evaluate the transaction using a strategic context? · What potential opportunities and risks are involved in growing through acquisition?

4.2 Roles a board can take in M&A

Of course, the board cannot completely replace the management team in taking decisions, but it can go beyond its common legal, regulatory, and fiduciary obligations during M&A by fulfilling 3 important roles (Bhagat & Huyett, 2013). Their roles go further than the common obligations one would expect from a board in an M&A transaction and are further discussed in the following:

Challenging value-creation possibilities: This involves creating a subcommittee to challenge the thinking of the CEO and managers on the transactions. This helps managers to benefit from M&A impact on performance while avoiding its traps. More specifically, the board will closely challenge the following: the strategy fit which involves clarifying the relationship between a possible transaction and the corporate strategy, test the assumptions used to justify a deal by demanding clarity—using discounted-cash-flow methods—about the value created compared with the value- creation potential other bidders would bring to the deal and making a risk/reward analyses that should reflect the possible outcomes of a deal.

Testing merger integration plans: Overseeing the post-merger integration can really boost the value created by M&A (Protiviti, 2016). Bhagat & Huyett (2013) mentions that effective PMI (post- merger integration) plans can boost net value creation for the buyer by two to three times the net value that should be created through ineffective PMI plans. Post-merger integration should beat and not meet the value creation decided in the pro forma. To be able to succeed in this, it is important to appoint experienced senior integration managers in these transactions.

Helping managers to create a corporate competitive advantage in M&A: This role of the board aims at creating an asset that is difficult to copy for competitors. The board can play an important role in creating such a competitive advantage along three dimensions: · M&A strategy, which involves agreeing on the role M&A plays in creating value for the shareholders. · M&A leadership by helping the CEO and the CFO to become more explicit about the roles of the corporate center and business units in M&A. · M&A processes by reading and challenging the M&A playbook- a guide for the different types of deals it pursues.

4.3 Target firm in M&A

“I can only describe the entire merging process as being full of secrets, lies, tricks, and games with little or no consideration for the very excellent management team that made this a valuable business. They did not explore synergies or mutual growth but went straight for dominance and control. They pretty much left it up to empire-building subsidiary managers less qualified than our own managers to manage the business” (Krug, 2009).

This quote shows the difficulty and importance of involving and integrating the target firm in the newly formed company. Prior research has shown that retaining target executives is an important part of a successful integration strategy (Krug & Hegarty, 2001). These executives may have knowledge, experience and relationships which are valuable. Think about the situation where a takeover takes place because the target company outperforms their competitor before the acquisition. This is an indication that the acquirer firm highly values something in this company, so keeping the target executives on board is a logical choice. On the other hand, in some acquisitions, replacing executives may be an important source of value creation, since this could lead to cost savings and less resistance to the acquisition, especially in a hostile takeover (Lubatkin, Schweiger, & Weber, 1999). Krug, Wright & Kroll (2014) examine the decision to retain or replace these executives, depending on the context of each acquisition. They mention 5 different perspectives that give deeper insight in the acquisition motives:

Market perspective: This perspective defines acquisitions as a mechanism for improving performance in underperforming firms. Here, executives engage in activities for maximizing their wealth at the expense of shareholders.

Top management perspective: This perspective mentions the importance of finding complementary top management teams. This could lead to both lower turnover and higher post- acquisition performance. It uses the idea of offsetting one firm’s strengths against the other firm’s weaknesses and the other way around.

Industry perspective: Economic, regulatory, or technological shocks that cause the restructuring of an industry can frequently be the main reason of M&A. In such situations, acquirers have to choose whether they make acquisitions at the beginning or the end of a merger wave, which implies being an early or a late mover.

Firm perspective: The acquisition is seen as a value-enhancing strategy for the whole firm, so including the shareholders in contrast to the market perspective. The process of creating value is driven by combining complementary resources in unique ways.

Country perspective: This perspective examines the foreign direct investments of multinationals. This investment is driven by ownership and locational advantages which lead to cost benefits for the multinational.

The understanding of these different perspectives can help to give insight in the reasons why an acquirer would decide to take over a certain target firm.

4.4 Board connections in M&A

Within an M&A transaction, it is possible that there exists a connection between the boards of the target firm and the acquirer firm. Different connections between the two are possible. First of all, there is the logical and most common situation of totally independent boards which haven’t had any connections in the past and neither have any in the present. Cai & Sevilir (2012) study two other possible types of connection between target and acquirer firm which they describe as ‘first- degree connection’ and ‘second-degree connection’. In the first type the two firms share a common director before the deal announcement while in the second type one director from the acquirer and one director from the target have been serving on the board of a third firm before the deal announcement.

It is clear that the existence of a connection between two boards prior to the M&A transaction can have advantages throughout the process (Stuart & Yim, 2010). The connection could improve the communication and information flow between the two firms, which would positively affect the transaction costs because the need for advisory sources would decrease. Connected boards will also increase each firm's knowledge and insight in the other firm's operations and corporate culture. Otherwise, this information would still have to be gathered before the M&A process.

Although both first-degree and second-degree connections can be seen as supportive for the information flow between the two firms, it is important to mention that first-degree connections only involve one director while second-degree connections involve two directors, one from the target firm and one from the acquirer firm. One would expect that first-degree connections will be more beneficial for M&A, since this is a more direct connection. However, it is possible that two directors, each with knowledge about private and inside information of his own firm, may have greater combined ability and capacity to complete an M&A transaction, compared to first-degree connections (Cai & Sevilir, 2012).

Cai & Sevilir (2012) came to the conclusion that first-degree connections benefits acquirers because of the information advantage about the true value of the firm and the lack of competition from outside less-informed bidders. Second-degree connections, on the other hand, appear to facilitate efficient deal-making and better operating performance of the combined firm after the deal completion. The differences in impact on the M&A process can be explained by the fact that a first-degree connection only involves one director, while a second-degree connection involves two.

When looking at the relationship between M&A activity and the occurrence of board connections, Schonlau & Singh (2009) found that companies with more connected boards compared to other companies are more likely to execute acquisitions as well as to be acquired. However, in the sample of data investigated in this paper, no connections between both firms involved in the deal were discovered.

5 Empirical research

In this section, an empirical study will be conducted on the drivers of board retention in M&A. In section 5.1 the method of data gathering is explained with the purpose of verifying how we found information on specific determinants that are used and why some determinants, that were described in the ‘Board composition’ section, were left out. On top of the method of data gathering, the descriptive statistics of the data sample are described as well. Section 5.2 consists of the different hypotheses that are tested concerning board retention in M&A and their results.

5.1 Data

We compiled a sample of data from 120 companies that were involved in 60 M&A deals between 2013 and 2018 all over the world. The database we used for finding our deals is ‘Zephyr’ from Bureau van Dijk, since this database focuses especially on M&A transactions. In this database, the M&A deals are ranked in order of their deal value, so the sample of data we use consists of the transactions with the highest deal value first, chronologically followed by deals with lower deal values. Only companies that were 100% merged or acquired are included in our sample. Companies that for example acquired only 35% of the target company were left out of the sample. As mentioned in the section ‘Public vs private boards’, information on the board of directors of private companies is not readily available and therefore they are left out of the sample. Nevertheless, these companies are normally not involved in top M&A deals in terms of deal value. All the deals in the sample were executed between companies in related businesses so we could not make a distinction between related and unrelated businesses. The last consideration that has to be taken into account was the exclusion of deals where German or Dutch companies

participated in, since they have a different legal system regarding the board of directors. These differences are already explained in the ‘Board structure’ section.

We used a time-span of 5 years because more recent deals give more certainty that information on annual reports is still available online. The annual reports from the companies included in our sample will be used to look up the board of directors of both the firms involved in the M&A deal as well as the new board of the combined entity that was composed resulting from the M&A deal. For acquisitions, both the old board members from the target company and the acquiring company were compared to the members of the newly composed board after the acquisition deal to see whether a director was retained or not. For mergers, the two boards involved are looked up and compared with the newly merged board.

When all the board members of the different companies were included in the dataset, their specific characteristics needed to test the hypotheses in the following section, were added. Most of the information was found in the annual reports of the companies, although some characteristics required extra research. Being a male/female, insider/outsider or member with CEO duality was normally (with some exceptions) found in the annual report of the companies. Also, the sales of the acquiring company in the previous year of the M&A deal, needed for testing hypothesis 8, were found in their annual reports. To test board reputation, we used the proxy “number of directors in the board with board connections in other companies”. However, to find these board connections, extra research was needed. Both the websites ‘bloomberg.com’ and ‘marketscreener.com’ were used and compared to look up the board connections of each board member involved in the sample. Stock ownership of every board member was left out as a determinant, since there was little consensus on this topic with different sources giving different ownership percentages.

Table 1: Acquisition Deals and Deal Values of Acquisitions Acquisitions N° of Deal Acquiring Company Target company Deal Value 1 Actavis Allergan $ 70.500.000.000,00 2 Shire Takeda $ 59.000.000.000,00 3 Royal Dutch Shell BG Group $ 53.000.000.000,00 4 Medtronic Covidien $ 42.900.000.000,00 5 Centurylink Level 3 $ 34.000.000.000,00 6 Softbank Arm Holdings $ 32.200.000.000,00 7 Shire Baxalta $ 32.000.000.000,00 8 Johnson & Johnson Actilion $ 30.000.000.000,00 9 ACE The Chubb $ 28.300.000.000,00 10 Enbridge Spectra Energy $ 28.000.000.000,00 11 Reynolds American Lorillard $ 27.400.000.000,00 12 Microsoft Linkedin $ 26.200.000.000,00 13 Actavis Forest Laboratories $ 25.000.000.000,00 14 Becton Dickinson C.R. Bard $ 24.000.000.000,00 15 UTC Rockwell Collins $ 23.000.000.000,00 16 AbbVie Pharmacyclics $ 21.000.000.000,00 17 Western Digital Sandisk $ 19.000.000.000,00 18 Broadcam CA Technologies $ 18.900.000.000,00 19 Altice Cablevision Systems $ 17.700.000.000,00 20 Intel Altera $ 16.700.000.000,00 21 Reckitt Benckiser Mead Johnson $ 16.600.000.000,00 22 Nokia Alcatel Lucent $ 16.600.000.000,00 23 Newell Rubbermaid Jarden $ 16.000.000.000,00 24 Intel Mobileye $ 15.300.000.000,00 25 AXA XL Group $ 14.900.000.000,00 26 Analog Devices Linear Technology $ 14.800.000.000,00 27 Schlumberger Cameron International $ 14.800.000.000,00 Scripps Networks $ 14.600.000.000,00 28 Discovery Interactive 29 Valeant Salix $ 14.500.000.000,00 30 Pfizer Medivation $ 14.000.000.000,00 31 Danaher Pall $ 13.800.000.000,00

32 Amazon Whole Foods $ 13.700.000.000,00 33 Thermo Fisher Scientific Life Technologies $ 13.600.000.000,00 34 Air Liquide Airgas $ 13.400.000.000,00 35 Repsol Talisman Energy $ 13.000.000.000,00 36 CVS Health Omnicare $ 12.900.000.000,00 37 Danone Whitewave $ 12.500.000.000,00 38 Becton Dickinson CareFusion $ 12.200.000.000,00 39 Southern Company AGL Resources $ 12.000.000.000,00 40 Gilead Sciences Kite Pharma $ 11.900.000.000,00 41 NXP Semiconductors Freescale Semiconductor $ 11.800.000.000,00 42 Brookfield Asset Management Forest City Realty $ 11.400.000.000,00 43 Fortis ITC Holdings $ 11.300.000.000,00 44 Sherwin-Williams Valspar $ 11.300.000.000,00 45 Melrose GKN $ 11.000.000.000,00 46 Emera TECO Energy $ 10.400.000.000,00 47 TransCanada Columbia Pipeline Group $ 10.200.000.000,00 48 Vistra Energy Dynegy $ 10.000.000.000,00 49 Merck Cubist Pharmaceuticals $ 9.500.000.000,00 50 Concho Resources RSP Permian $ 9.500.000.000,00 51 Diamondback Energy Energen $ 9.200.000.000,00 52 Northrop Grumman Orbital ATK $ 9.200.000.000,00 Fidelity National Information $ 9.100.000.000,00 53 Services Sungard Data Systems 54 Wisconsin Energy Integrys Energy Group $ 9.100.000.000,00 55 Dollar Tree Family Dollar $ 8.500.000.000,00 56 Microchip Technology Microsemi $ 8.350.000.000,00

Table 2: Merger Deals Mergers N° of Deal Merging Company 1 Merging Company 2 1 Dow Chemical DuPont 2 Tyco Johnson Controls 3 Nutrien Agrium 4 Vantiv Worldpay

5.1.1 Descriptive statistics data sample 5.1.1.1 Acquistions

As already mentioned before, our data sample consists of 60 deals involving 180 boards of directors. We made a distinction between mergers and acquisitions in our data sample, which resulted in 168 boards involved in 56 acquisition deals and 12 boards involved in 4 merger deals. Regarding the acquisitions we did research on, we found that 630 of the 1856 directors involved had a seat in the board of the acquiring company, whereas 567 directors had a seat in the board of the target company and 659 directors had a seat in the board of the newly combined company.

Looking at the acquiring companies, 630 directors are seated in their boards of which 576 directors were retained and added to the new combined board. Concerning their characteristics, 496 directors are males and only 134 directors are females, 556 directors claim directorship in another company than the one involved in the M&A deal and 90 directors are considered an insider.

The target companies, however, have 567 directors seating in their boards of which only 51 directors were retained and added to the new combined board. Concerning their characteristics, 474 directors are males and only 93 directors are females, 459 directors claim directorship in another company than the one involved in the M&A deal and 77 directors are considered an insider.

Finally, 659 directors received a seat in the new combined board after the acquisition deal. 577 members claim directorship in another company than the two involved in the acquisition deal and 94 members are considered an insider in the new combined entity.

Table 3: Retention of Directors in Acquiring Company and Target Company

Retention of Directors Directors of Acquiring Company Directors of Acquiring Company (%) Directors of Target Company Directors Target Company (%) Retained Directors 576 91,43% 51 8,99% Non-Retained Directors 54 8,57% 516 91,01% Total Directors 630 100,00% 567 100,00%

Table 4: Gender Diversity of Directors in Acquiring Company and Target Company

Gender of Directors Directors of Acquiring Company Directors of Acquiring Company (%) Directors of Target Company Directors Target Company (%) Male Directors 496 78,73% 474 83,60% Female Directors 134 21,27% 93 16,40% Total Directors 630 100,00% 567 100,00%

Table 5: Board Connections of Directors in Acquiring Company and Target Company

Board Conncetions of Directors of Directors of Acquiring Directors of Target Directors Target Directors Acquiring Company Company (%) Company Company (%) Directors New Board Directors New Board (%) Directors with other Board Connections 556 88,25% 459 80,95% 577 87,56% Directors with no other Board Connections 74 11,75% 108 19,05% 82 12,44% Total Directors 630 100,00% 567 100,00% 659 100,00%

Table 6: Inside or Outside Directors in Acquiring Company and Target Company

Directors of Directors of Acquiring Directors of Target Directors Target Insiders in Board Acquiring Company Company (%) Company Company (%) Directors New Board Directors New Board (%) Insider Directors 90 14,29% 77 13,58% 94 14,26% Outsider Directors 540 85,71% 490 86,42% 565 85,74% Total Directors 630 100,00% 567 100,00% 659 100,00%

In order to be able to control our data for industry differences, we identified the following 7 industry categories in our acquisition deals: Medical Industry, Energy Industry, ICT & Software Industry, Telecommunications Industry, Banking Industry, Consumer Goods Industry and a rest category defined as Rest Industry. As shown in the table below, 15 of the 56 deals we did research on could be placed in the category of the Medical Industry, 13 in the Energy Industry, 11 in the ICT & Software Industry, 3 in the Telecommunications Industry, 2 in the Banking Industry, 5 in the Consumer Goods Industry and 7 in the Rest Industry.

Table 7: Industries of Acquisition Deals

Industries Acquistions Number of Deals Number of Deals (%) Medical Industry 15 26,79% Energy Industry 13 23,21% ICT & Software Industry 11 19,64% Telecommunication Industry 3 5,35% Banking Industry 2 3,57% Consumer Goods Industry 5 8,93% Rest 7 12,5% Total 56 100,00%

Of those 56 acquisition deals we did research on, the maximum deal value was 70 500 000 000 USD and the minimum deal value was 8 350 000 000 USD. The average deal value was 13 570 833 333 USD. Geographically, 33 deals were executed between 2 United States based companies, so in 23 deals there was at least one company involved in the acquisition that was not based in the United States. An important comment is the fact that retainment of the directors from the target company only occurred in 23 deals, so in 33 deals there were no target board members added to the new combined board.

5.1.1.2 Mergers

In the 4 merger deals in our sample, there are 84 directors that have a seat in the board of a merging company, 52 of those 84 directors received a seat in the newly combined board. It is clear that in the case of mergers, we cannot make a distinction between target and acquiring company.

Concerning the characteristics of the directors seating in the boards of the merging companies, 67 of the 84 directors are males and only 17 are females, 68 of the 84 directors claim directorship in another company than the one involved in the merger deal and 14 of those 84 directors are considered an insider.

Looking at the newly combined board after the merger, 48 of the 52 directors seating in the new combined board claim directorship in another company than the one involved in the M&A deal and 8 of the 52 directors are considered an insider. Geographically, 2 of the 4 merger deals were executed between 2 United States based companies.

Table 8: Retention of Directors in Merging Companies

Retention of Directors Directors of Merging Companies Directors of Merging Companies (%) Retained Directors 50 59,52% Non-Retained Directors 34 40,48% Total Directors 84 100,00%

Table 9: Gender Diversity of Directors in Merging Companies

Gender of Directors (Mergers) Directors of Merging Companies Directors of Merging Companies (%) Male 67 79,76% Female Directors 17 20,24% Total Directors 84 100,00%

Table 10: Board Connections of Directors in Merging Companies

Board Connections of Directors Directors of Merging Companies Directors of Merging Companies (%) Directors New Board Directors New Board (%) Directors with other Board Connections 68 80,95% 48 92,31% Directors with no other Board Connections 16 19,05% 4 7,69% Total Directors 84 100,00% 52 100,00%

Table 11: Inside or Outside Directors in Merging Companies

Insiders in Board Directors of Merging Companies Directors of Merging Companies (%) Directors New Board Directors New Board (%) Insider Directors 14 16,67% 8 15,38% Outsider Directors 70 83,33% 44 84,62% Total Directors 84 100,00% 52 100,00%

Here, we also divide the 4 mergers in the same 7 industry categories as with the acquisition deals. However, the 4 deals are divided over only 2 industries. 1 deal is categorized in the Banking Industry while the other 3 deals are categorized in the Rest Industry.

Table 12: Industries of Merging Deals

Industries Mergers Number of Deals Number of Deals (%) Medical Industry 0 0% Energy Industry 0 0% ICT & Software Industry 0 0% Telecommunication Industry 0 0% Banking Industry 1 25% Consumer Goods Industry 0 0% Rest 3 75% Total 4 100,00%

5.1.1.3 T-tests on descriptive statistics

Next to the basic descriptive statistics, we could notice a trend that boards of combined companies after an M&A deal tend to be larger in size. We tested this trend with a t-test of paired samples and assumed that it is only relevant to test this trend with the samples:” Board Acquiring Company” and “Board New Company” where we oppose the board size of the acquiring company against the board size of the new combined company. It was found that the board size of acquiring companies had a mean of (M = 11.25, SD = 2,314) which is lower than the board size of the new combined company (M = 11,79, SD = 2,349). Executing this t-test for paired samples in table 13, we found that the board size of the new combined company is significantly larger , t(59) = -3,536, p 0,0005 (one-sided), than the board size of the acquiring company on a 5% significance level (and even on 1% level), so the trend can be supported.

Table 13: Board Size Means for Acquiring Companies and New Combined Companies

Board Size Mean N Std. Deviation Std. Error Mean Board Acquiring Company 11,25 56 2,314 ,309

Board New Company 11,79 56 2,349 ,314

Paired Samples Test Paired Samples Test for Differences

t df Sig. (2-tailed) Mean S.D S.E. Mean Pair 1: Board Size Acquiring -3,536 59 0,001 -0,650 1,424 0,184 & Board Size New

As already mentioned before, we made a distinction between mergers and acquisitions. Logically, one would think that retainment of directors from both companies will be more equally divided in a merger than in an acquisition. To have statistic evidence of this assumption, we test this with two independent-samples t-tests.

For the first independent-samples t-test we both use a sample of retainment percentages from the directors seating in the boards of the companies involved in a merger and a sample of retainment percentages of directors seating in the board of an acquiring company during an acquisition. The retention ratio of directors seating in a board of a company involved in a merger deal had a mean score of (M = 62,7652%, SD = 16,33731%), so approximately 63% of the directors are retained if they are a member of a board of a company involved in a merger. Compared with acquisitions, the retention ratio of directors seating in the board of an acquiring company had a mean score of (M = 91,8111%, SD = 9, 53881%). Following the independent-samples t-test we can state that directors seating in a board of an acquiring company during an acquisition enjoy a significantly higher, t(7,696) = -4,91, p = 0,0005 (one-sided), retainment chance than directors seating in a board of merging companies.

For the second independent-samples t-test we used both a sample of retainment percentages from the directors seating in the boards of the companies involved in merger and a sample of retainment percentages of directors seating in the board of a target company during an acquisition. The retention ratio of directors seating in the board of a target company had a mean score of (M = 9,0121% , SD = 9,53881%), so roughly 9% of the directors are retained if they are a member of a board in a target company. Compared with mergers, whereby approximately 63% of the directors involved in the merging boards are retained. Following the independent-samples

t-test we can state that directors seating in the board of a target company during an acquisition enjoy a significantly lower, t(62) = 10,726, p = 0,0000 (one-sided), retainment chance than directors seating in a board of merging companies.

Table 14: Retention Ratio Means for Merging Companies and Acquiring Companies

Retention Ratio Acquisition(1) Mergers(0) N Mean Std. Deviation Std. Error Mean R.R. Merging Companies Group 0 8 62,7652% 16,33731% 5,77611%

R.R. Acquiring Group 1 56 91,8111% 9,53881% 1,27468% Companies

Independent Samples Test t-test for Equality of Means

t df Sig. (2-tailed) Mean Difference S.E. Difference R.R. Equal variances -4,91 7,696 0,001 -29,04594% 5,91509% assumed

Table 15: Retention Ratio Means for Merging Companies and Target Companies

Retention Ratio Acquisition(1) Mergers (0) N Mean Std. Deviation Std. Error Mean R.R. Merging Companies 0 8 62,7652% 16,33731% 5,77611% R. R. Target Companies 1 56 9,0121% 12,25789% 1,63803%

Independent Samples Test t-test for Equality of Means

t df Sig. (2-tailed) Mean Difference S.E. Difference R.R. Equal variances 10,726 62 0,000 50,35129% 4,69421% not assumed

5.2 Hypotheses and results

After describing M&A, board of directors, the role of the board within an M&A and our data, we can build some hypotheses based on the knowledge we have gained from our literature study. These hypotheses are based on specific characteristics that are important when a board member wants to be retained in the new combined board. Based on the literature study we conducted on the differences in composition and characteristics of the board we can expect different relationships between characteristics of board members and retainment of those members. Since retainment between acquiring and target board differ substantially, these relationships are tested separately for both the target and acquiring firm in order to be able to see significance differences in board characteristics. Hypothesis 1: Being a board member with connections in other boards different from the one of the acquiring company involved in the acquisition, gives you a higher chance of being retained in the new combined board. Hypothesis 2: Being an insider in the board of the acquiring company, gives you a higher chance of being retained in the new combined board.

The first hypothesis supports the fact that acquiring boards composed of directors with more directorships in other companies are considered more effective because holding more directorships indicates higher ability and accomplishment (Mallin & Michelon, 2011), and thus we assume that this leads to a higher chance of being retained. With the second hypothesis, we expect that being an insider, and thus working in the company while sitting on the board, gives you important inside knowledge (Goodstein et al., 1994) that could lead to a higher chance of retainment since that knowledge needs to be transferred to the newly formed company after the M&A. In hypotheses 3 and 4 the same is expected for target boards as well as in hypothesis 5 and 6 for mergers.

To test the first 2 hypotheses, we run a binary logistic regression to examine the determinants of director retention in the acquiring company. The dependent variable is a dummy variable ‘Retained Acquiring’ indicating retention (1) or no retention (0) in the new combined board after the acquisition. The independent variables include characteristics of individual directors such as being an insider (0) or outsider (1), measured by the dummy variable ‘Insider/Outsider’ and the number of board connections other than the one of the acquiring company (zero=0, one or more=1), measured by the dummy variable ‘Board Connections’. To control for structural differences in industry, geography, gender and importance of the deal we have added these variables as control variables. These control variables are, respectively, 7 different industry dummy variables, a dummy variable if both companies involved in the M&A deal are both U.S.

companies (1) or not (0), a dummy variable for being a male (1) or female (2) and a variable ‘Relative Deal Importance’, measured by the deal value on the sales of the year before the M&A deal of the acquiring company.

In table 17, results show that both the independent variables that we wanted to test are statistically significant on a 5% significance level. Consequently, being an insider in the board of the acquiring company as well as having board connections has a significant impact on the likelihood of being retained in the new combined board after the acquisition. The odds ratio of the variable ‘Insider/Outsider’ indicates that when holding all other variables constant, an inside director has 24,1% more chance of being retained in the new combined board than an outside director. Looking at the odds ratio of the variable ‘Board Connections’ we can say that a director which claims directorship in other companies’ boards has 231,7% more chance of being retained in the new combined board than a director which doesn’t claim directorship in other companies’ boards when all other variables are held constant.

We also found that the variable ‘Gender’ was significant on a 10% significance level, whereby female directors have a significant higher chance of being retained than male directors in the new combined board after the acquisition. However, in past literature, this relation was never mentioned to be important. The coefficients for the other variables are insignificant. These findings are in line with the predictions we made in the first two hypotheses.

Table 16: R2 of BLR Model for Directors of Acquiring Company

Cox & Snell R Square Nagelkerke R Square ,031 ,070

Table 17: BLR model Acquiring Company

BLR model examing the drivers behind board retention of directors having a seat in the board of the acquiring company

Variables B S.E. Wald Odds Ratio Gender -0,736* 0,424 3,005 0,479 Insider/Outsider -1,425** 0,619 5,292 0,241 Board Connections 0,840** 0,377 4,969 2,317 Relative Deal Importance -0,108 0,102 1,117 0,898 U.S. deal 0,202 0,328 0,379 1,224 Medical Industry 0,123 0,501 0,060 1,131 Energy Industry 0,540 0,553 0,952 1,715 ICT & Software Industry -0,146 0,517 0,079 0,864 Telecommunication Industry -0,830 0,658 1,594 0,436 Banking Industry 0,315 0,873 0,130 1,370 Consumer Goods Industry -0,026 0,610 0,002 0,974 Constant 3,542*** 0,866 16,744 34,527 * Significant at 10% ** Significant at 5% *** Significant at 1%

Hypothesis 3: Being a board member with connections in other boards different from the one of the target company involved in the acquisition, gives you a higher chance of being retained in the new combined board. Hypothesis 4: Being an insider in the board of the target company, gives you a higher chance of being retained in the new combined board.

In table 19, we test the same characteristics and thus independent variables as in hypotheses 1 and 2, but for board members of the target company. As described in the ‘Descriptive statistics data sample’ part, there is a big difference in retainment between the acquiring company and the target company, so a separate binary logistic regression is needed. The dependent variable changes to a dummy variable ‘Retained Target’ indicating retention (1) or no retention (0) in the new combined board after the acquisition. The independent as well as the control variables remain the same but relate to board members of the target company. We find different results than in the case of the acquiring board. As show in table 19 and in line with the previous hypotheses, the independent variable ‘Insider/Outsider’ is statistically significant on a 5% significance level. Note that it is even significant on a 1% significance level. When we look at the odds ratio of the variable ‘Insider/Outsider, we can say that an inside director has 32,2% more chance of being retained in the new combined board than an outside director when all other variables are held constant. Contradictory with our findings above, the coefficient of the independent variable ‘Board Connections’ is no longer significant.

Being an insider in the board is again significantly important for board retention, while having board connections is no longer significantly important. As a result, hypothesis 3 is not supported while hypothesis 4 is. An important remark, when we take a look at our control variable ‘Relative Deal Importance’, we see that this variable is also significant. Because of this, we will further examine this in hypothesis 8 with another binary logistic regression. However, the coefficients for the other variables are insignificant.

Table 18: R2 of BLR Model for Directors of Target Company

Cox & Snell R Square Nagelkerke R Square 0,061 0,134

Table 19: BLR model Target Company (1)

BLS model examing the drivers behind board retention of directors having a seat in the board of the Target Company

Variables B S.E. Wald Odds Ratio Gender 0,182 0,471 0,149 1,199 Insider/Outsider -1,132*** 0,363 9,735 0,322 Board Connections 0,291 0,417 0,488 1,338 Relative Deal Importance 0,245*** 0,086 8,137 1,277 U.S. deal -0,031 0,337 0,009 0,969 Medical Industry 18,854 4417,459 0,000 154222434,2 Energy Industry 18,857 4417,459 0,000 154672848,7 ICT & Software Industry 18,971 4417,459 0,000 173405902,3 Telecommunication Industry 19,126 4417,459 0,000 202375661,9 Banking Industry 19,641 4417,459 0,000 338738074,1 Consumer Goods Industry 18,823 4417,459 0,000 149521811,3 Constant -20,991 4417,459 0,000 0,000 * Significant at 10% ** Significant at 5% *** Significant at 1%

Hypothesis 5: Being a board member with connections in other boards different from the one’s included in the merger, gives you a higher chance of being retained in the new combined board. Hypothesis 6: Being an insider in the board of one of the merging companies, gives you a higher chance of being retained in the new combined board.

Since there is a substantial difference of retainment between directors seating in the board of a company involved in a merger or directors seating in the board of a company involved in an

acquisition, as mentioned in the descriptives part, we found it necessary to run a separate binary logistic regression for directors involved in a merger. The dependent variable is a dummy variable ‘Retained Merger’ indicating retention (1) or no retention (0) in the new combined board after the merger. Again, the same independent variables as well as control variables are used. However, only 2 industries were included as control variables, since the 4 merger deals we included in our data sample could be divided between 1 deal in the Banking Industry and 3 deals in the Rest Industry.

Looking at the results, we can state that the independent variable ‘Board Connections’ is statistically significant on a 5% significance level and even on a 1% significance level. The independent variable ‘Insider/Outsider’ is insignificant and the coefficients of the other variables are insignificant as well. We can state that, in mergers, having board connections increases the chance of being retained significantly and it is even so that having board connections increases the chance of being retained with 692,4% according to the odds ratio with the assumption that all other variables are held constant. That in contrast with the variable ‘Insider/Outsider’ where being an insider in the board does not influence the chance of retainment significant.

Table 20: R2 of BLR Model for Directors of Merging Companies

Cox & Snell R Square Nagelkerke R Square 0,135 0,182

Table 21: BLR model Merging Companies

BLR model examing the drivers behind board retention of directors having a seat in the board of the Merging Companies

Variables B S.E. Wald Odds Ratio Gender -0,403 0,620 0,422 0,668 Insider/Outsider -0,898 0,733 1,502 0,407 Board Connections 1,935*** 0,653 8,787 6,924 U.S. deal 0,429 0,595 0,521 1,536 Banking Industry -0,444 0,723 0,377 0,642 Constant -0,198 1,017 0,038 0,821 * Significant at 10% ** Significant at 5% *** Significant at 1%

Hypothesis 7: Being a CEO and chairman of the board (CEO duality) in the target company during an acquisition, gives you a higher chance of being retained in the new combined board.

In hypothesis 7, we consider the combination of being both chairman and CEO as an advantage for a board member for being retained. One would expect that a person who combines these 2 functions has a lot of power, strong leadership and knowledge about a company (Finkelstein & D'Aveni, 1994) and has a good chance of being retained after an M&A. As stated in hypothesis 7, the impact of CEO duality will only be tested for board members of the target firm. This is a direct result of the fact that, in our sample, every board member of the acquiring board who holds the position of CEO is retained and joins the new combined board after the acquisition.

The dependent variable is a dummy variable ‘Target CEO Retained’ indicating retention (1) or no retention (0) in the new combined board after the acquisition. The independent variable is also a dummy variable ‘CEO Duality Target’ indicating being CEO and chairman (1) or, as a CEO, not being chairman of the board (0). Since we test the influence of two dummy variables on each other, a chi-square test of independence is executed. As shown in table 23, the relation between CEO duality and retention is not significant, X2 (1, N= 56) = 0,139, p = 0,709. On a total of 56 acquisition deals, only 7 of the 30 CEO’s who held the position of both CEO and chairman of the board were retained while 5 of the 26 CEO’s without CEO duality were retained. This can be verified in the crosstab linked to table 22. As a result of the insignificant result we found, hypothesis 7 is not supported.

Table 22: Cross table

Cross table of Target CEO Retained & CEO Duality Target

CEO Duality Target Target CEO No (0) Yes (1) Total Retained No (0) 21 23 44 Yes (1) 5 7 12 Total 26 30 56

Table 23: Chi-Square Test

Chi-Square Test of Target CEO Retained & CEO Duality Target

Value Asymptotic Sig. Exact Sig. Exact Sig. (2-sided) (2-sided) (2-sided)

Pearson-Chi Square 0,139 0,709

Continuity Correction 0,002 0,963

Likelihood Ratio 0,140 0,708 Fisher’s Exact Test 0,755 0,483

N 56

Hypothesis 8: The higher the deal value on sales of the acquiring company, the higher the chance of being retained as a target board member.

The 8th and last hypothesis is not linked to board member characteristics. As already stated previously, we expect that a high deal value of the acquisition relative to the sales of the acquiring company the year before the acquisition will have an impact of the retainment of board members of the target company. We will make this clear with an example. If a deal between two companies is closed for a value of 15 billion USD, the importance of that deal for the acquirer will depend on its yearly sales. An acquirer which had sales of 5 billion the year before the acquisition will give greater importance to this deal than an acquirer with sales of 45 billion the year before the acquisition (3 versus 0,3). When the deal value on sales ratio is high, the M&A deal will have higher importance towards the acquirer. The higher that ratio, the higher the need for a better integration of the target company in the acquiring company. Retaining more board members of the target company is expected to be beneficial for that integration process (Krug & Hegarty, 2001).

To test our last hypothesis, we run a binary logistic regression. The dependent variable is a dummy variable ‘Retained Target (%) indicating a (1) when there was 0% retention from the board of the target company and indicating a (0) when there has been retention between 1-100% from the board of the target company. The independent variable ‘Relative Deal Importance’ indicates the importance of the deal by calculating the deal value on the sales of the acquiring company the year before the acquisition. To control for structural differences in industry, geography and board size of the target we have added some control variables. These control variables are, respectively, 7 different industry dummy variables, a dummy variable for being both U.S. companies (1) or not (0) and the logarithm of the board size of the target company.

The results in table 25 show a significant coefficient for ‘Relative Deal Importance’ on a 5% significance level whereby we can conclude that the relative deal importance has a significant impact on the retention of board members of the target company. Looking at the odds ratio, when all other variables are held constant, we can say that when the value of our variable ‘Relative Deal Importance’ rises with one point, the chance of having board members of the target company getting a seat in the new combined board rises with 43,1%. All the other variables are insignificant. Our last hypothesis is thus supported by the results in table 25.

Table 24: R2 of BLR Model for Importance of Deal

Cox & Snell R Square Nagelkerke R Square 0,323 0,434

Table 25: BLR model Target Company (2)

BLR model examing the importance of the deal for retention of directors seating in the board of the Target Company

Variables B S.E. Wald Odds Ratio Relative Deal Importance -0,841** 0,328 6,597 0,431 U.S. Deal 0,490 0,729 0,452 1,632 Log Board Size 0,137 1,167 0,014 1,147 Medical Industry -21,251 13563,605 0,000 0,000 Energy Industry -21,513 13563,605 0,000 0,000 ICT & Software Industry -22,176 13563,605 0,000 0,000 Telecommunication Industry -23,080 13563,605 0,000 0,000 Banking Industry -22,076 13563,605 0,000 0,000 Consumer Goods Industry -21,953 13563,605 0,000 0,000 Constant 22,455 13563,605 0,000 5653253619 * Significant at 10% ** Significant at 5% *** Significant at 1%

6 Conclusion

The board of directors is considered to have both a monitoring as well as a strategic role in the company. The monitoring role includes overseeing management decisions in order to protect both the firm and shareholders rights. The strategic role argues that the board should be included in the strategy process and in top management decisions. These decisions include considerations about being involved in M&A or not. In this paper, we study the top 60 M&A deals over the last 5 year in order to understand the influence of different drivers on the retainment of different board members involved in both the acquiring and target company of an acquisition deal as well as both companies involved in merger deals.

By executing basic t-tests on the descriptive statistics, we find evidence that a newly formed board after the M&A deal tends to be larger in size. Board size increases as the two boards combine. This is consistent with the results of Davidson, Sakr, & Ning (2004). When looking at the distinction between mergers and acquisitions, the retainment of directors in the two boards involved in the M&A deal is more equally divided in merger deals than in the case of acquisition deals.

Separate from the 2 conclusions based on the descriptive statistics, we formulated 7 hypotheses based on the characteristics of board members and 1 hypothesis on the effect of the relative importance of the deal. We find evidence that characteristics of board members and the relative importance of the M&A deal play an important role in being retained in the new combined board. The extent to which the different drivers play a role in retention depends on whether the directors are members of the acquiring, target or merger board.

Looking at the hypotheses involving acquisition deals, we find that inside directors are more likely to be retained in the board than outside directors for both the acquiring as well as the target board, because they are considered having important inside knowledge. Concerning the target board, this is consistent with the paper of (Xie et al., 2009). Having board connections as a board member of the acquiring company also increases the chance of retention, because these members carry a higher reputation than members without other board connections. However, we don’t find evidence for this hypothesis when dealing with the target board.

We find evidence that board members of the target board are less likely to be retained than board members of the acquiring board. This is consistent with the implications of the Hermalin & Weisbach (1998) model. To further elaborate on the target board, we tested 2 additional hypotheses concerning this board. We expect the dual role of CEO and chairman (CEO duality)

to give a board member a higher chance of being retained. However, we did not find any evidence for this assumption. If we look further than only the characteristics of target board members, we find evidence that a higher importance of the deal for the acquiring company has a positive impact on the retainment of target directors. This can be explained by the higher need of integration of the target company in the acquiring company when dealing with high relative deal values.

To conclude, we test the impact of being an insider or outsider and having board connections on the two boards involved in merger deals. We find evidence that board connections have a positive impact on being retained while being insider or outsider no longer has an impact on retention.

7 Bibliography

Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey. Journal of economic literature, 48(1), 58-107. Agrawal, A., & Jaffe, J. (2000). The Post Merger Performance Puzzle. Advances in Mergers and Acquisitions, 17(1), 119-156. Akben-Selcuk, E. (2014). Do Mergers and Acquisitions create value for Turkish Target Firms? An Event Study Analysis. Procedia Economics and Finance, 30, 15-21. Aktas, N., De Bodt, E., Bollaert, H., & Roll, R. (2016). CEO narcissism and the takeover process: from private initiation to deal completion. Journal of Financial and Quantitative Analysis, 51(1), 113-137. Amihud, Y., & Lev, B. (1981). Risk Reduction as Managerial Motive for Conglomerate Mergers. The Bell Journal of Economics, 12(2), 605-617. Anand, S. (2008). Essentials of Corporate Governance. Canada: John Wiley & Sons. Andrade, G., Mitchell, M., & Stafford, E. (2001). New Evidence and Perspectives on Mergers. Journal of Economic Perspectives, 15(2), 103-120. Bagchi, P., & Rao, R. (1992). Decision making in Mergers: an Application of the Analytic Hierarchy Process. Managerial and Decision Economics, 13(2), 91-99. Bange, M. M., & Mazzeo, M. A. (2004). Board Composition, Board Effectiveness, and the Observed Form of Takeover Bids. The Review of Financial Studies, 17(4), 1185–1215. Bargeron, L., Schlingemann, F., Stulz, R., & Zutter, C. (2008). Why do Private Acquirers pay so little compared to Public Acquirers. Journal of Financial Economics, 89(3), 375-390. Barkema, H. G., & Schijven, M. (2008). How do Firms learn to make Acquisitions? A Review of Past Research and an Agenda for the Future. Journal of Management, 34(3), 594-634. Bartels, J., Douwes, R., Jong, M. D., & Pruyn, A. (2006). Organizational Identification during a Merger: Determinants of Employees' expected Identification with the New Organization. British Journal of Management, 17(3), 49-67. Bathala, C. T., & Rao, R. P. (1995). The Determinants of Board Composition: An Agency Theory Perspective. Managerial and Decision Economics, 16(1), 59-69. Bauer, F., & Matzler, K. (2014). Antecedents of M&A Succes: The Role of the Strategic Complementarity, Cultural Fit, and Degree of Integration. Strategic Management Journal, 35(2), 269-291. Ben-Amar, W., Francoeur, C., Hafsi, T., & Labelle, R. (2013). What Makes Better Boards? A Closer Look at Diversity and Ownership. British Journal of Management, 24(1), 85-101. Berkovitch, E., & Narayanan, M. (1993). Motives for Takeovers: An Emperical Investigation. Journal of Financial and Quantitive Analysis, 28(3), 347-362. Betton, S. E. (2008). Corporate takeovers. In E. Eckbo, Handbook of corporate finance: empirical corporate finance (pp. 291-430). North Holland: Elsevier. Bhagat, C., & Huyett, B. (2013). Modernizing the board’s role in M&A. Retrieved from Mckinsey: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our- insights/modernizing-the-boards-role-in-m-and-a Biryuk, D. (2019). 17 Defenses Against Hostile Takeovers. Retrieved from Biryuk Law Firm: https://www.biryuklaw.com/hostile-takeover-defenses/ Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637-659. Blake, R., & Mouton, T. (1984). Solving Costly Organizational Conflicts: Achieving Intergroup Trust, Cooperation and Teamwork. San Francisco: Jossey-Bass. Bodt, E., Cousin, J., & Roll, R. (2018). Emperical Evidence of Overbidding in M&A Contests. Journal of Financial and Quantitative Analysis, 53(4), 1547-1579.

VII

Booth, J. R., Cornett, M. M., & Tehranian, H. (2002). Boards of directors, ownership, and regulation. Journal of Banking and Finance, 26(10), 1973-1996. Bower, J. (2001). Not all M&As Are Alike--- and That Matters. Harvard Business Review, 79(3), 92-101. Boyd, B. (1990). Corporate linkages and organizational environment: A test of the resource dependence model. Strategic management journal, 11(6), 419-430. Brickley, J. A., Coles, J. L., & Jarrell, G. (1997). Leadership structure: Separating the CEO and Chairman of the Board. Journal of Corporate Finance, 3(3), 189-220. Cai, Y., & Sevilir, M. (2012). Board connections and M&A transactions. Journal of Financial Economics, 103(2), 327-349. Campo, J., & Hernando, I. (2004). Shareholder Value Creation in European M&As. European Financial Management, 10(1), 47-81. Campo, J., & Hernando, I. (2006). M&As Performance in the European Financial Industry. Journal of Banking and Finance, 30, 3367-3392. Capron, L., & Shen, J.-C. (2007). Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns. Strategic management journal, 28(9), 891-911. Cartright, S. (2005). Mergers and Acquisitions: An Update and Appraisal. International Review of Industrial and Organizational Psychology, 20, 1-38. Chaplinsky, S., & Niehaus, G. (1994). The Role of ESOPs in Takeover Contests. The Journal of Finance, 49(4), 1451-1470. Chartier, J., Liu, A., Raberger, N., & Silva, R. (2018). Seven Rules to crack down the code on revenue synergies in M&A. Retrieved from Mckinsey & Company: https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/seven- rules-to-crack-the-code-on-revenue-synergies-in-ma Chatterjee, S. (1986). Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms. Strategic Management Journal, 7, 119-140. Chen, F., Hope, O.-K., Li, Q., & Wang, X. (2011). Financial Reporting Quality and Investment Efficiency of Private Firms in Emerging Markets. The Accounting Review, 86(4), 1255- 1288. Christensen, C., Alton, R., Rising, C., & Waldeck, A. (2011). The Big Idea: The New M&A Playbook. Harvard Business Review, 89(3), 48-57. Conn, C., Cosh, A., Guest, P., & Hughes, A. (2001). The Impact on UK Acquirors of Domestic, Cross-border, Public and Private Acquisitions. Journal of Business Finance and Accounting, 32(5-6), 815-870. Cosh, A., Guest, P. M., & Hughes, A. (2006). Board Share-Ownership and Takeover Performance. Journal of Business Finance and Accounting, 33(3-4), 459-510. D.C. Bar Pro Bono Center. (2014). The Role of the Board of Directors in Financial Oversight. Retrieved from Lawhelp: https://www.lawhelp.org/files/7C92C43F-9283-A7E0-5931- E57134E903FB/attachments/4EFA05DA-0B76-4478-AC04-06AEDE61C6E7/financial- oversight-10-22-14.pdf Datta, D., Iskandar-Datta, M., & Raman, K. (2001). Executive compensation and corporate acquisition decisions. Journal of Finance, 56(4), 2299-2336. Davidson, W. N., Sakr, S., & Ning, Y. (2004). Competition For Board Seats Following Stock-For- Stock Mergers. The Journal of Financial Research, 27(1), 55-73. Davis, J. H., Schoorman, D., & Donaldson, L. (1997). Toward a stewardship theory of management. Academy of Management Review, 22(1), 20-48. Deazeley, B. (2009). What role should the Board of Directors play in strategic planning? Canada: Imagine Canada. DeChesare, B. (2012). Private vs. Public M&A Deals: Got Divested Assets and a Stepped-Up Tax Basis? Retrieved from mergersandinquisitions: https://www.mergersandinquisitions.com/private-company-ma/ Dehaene, A., De Vuyst, V., & Ooghe, H. (2001). Corporate Performance and Board Structure in Belgian Companies. Long Range Planning, 34(3), 383-398. Delios, A., & Beamish, P. W. (2004). International Business: An Asia Pacific Perspective. New Jersey: Pearson Education South Asia.

VIII

Deloitte. (2019). Board of directors. Retrieved from Deloitte: https://www2.deloitte.com/be/en/pages/risk/articles/board-of-directors.html Demb, A., & Neubauer, F. F. (1990). How can the board add value? European Management Journal, 8(2), 156-160. Dick, R. V., Ullrich, J., & Tissington, P. (2006). Working under a Black Cloud: How to sustain Organizational Identification after a Merger. British Journal of Management, 17, 69-79. Dunn, C. (1989). ESOPs: The 'Trojan Horse' of the Antitakeover Realm. Business Horizons, 32(4), 28-35. Edelman. (2018). Should a Board have a reputation? Retrieved from Edelman: https://www.edelman.com/post/should-a-board-of-directors-have-a-reputation Erhardt, N. L., Werbel, J. D., & Shrader, C. B. (2003). Board of Director Diversity and Firm Financial Performance. Corporate Governance: An International Review, 11(2), 102- 111. Fama, E., & Jensen, M. (1983). Separation of Ownership and Control. The journal of law and economics, 26(2), 301-325. Ferris, S. P., Jagannathan, M., & Pritchard, A. C. (2003). Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments. The Journal of Finance, 58(3), 1087-1111. Finkelstein, S., & D'Aveni, R. A. (1994). CEO Duality as a Double-Edged Sword: How Boards of Directors Balance Entrenchment Avoidance and Unity of Command. The Academy of Management Journal, 37(5), 1079-1108. Fooladi, M., & Shukor, Z. A. (2012). Board of Directors, Audit Quality and Firm Performance: Evidence from Malaysia. Melaka. Frank, J., & Harris, R. (1989). Shareholder Wealth Effects of Corporate Takeovers: The UK Experience. Journal of Financial Economics, 23(2), 225-249. Galai, D., & Masulis, R. (1976). The Options Pricing Model and the Risk Factor of Stock. Journal of Financial Economics, 3(1-2), 53-81. Gaughan, P. (2010). Mergers, Acquisitions, and Corporate Restructurings. Hoboken, NJ: John Wiley & Sons. Gertsen, M., & Soderberg, A. (1998). Foreign Acquisitions in Denmark: Cultural and Communicative Dimensions. Berlin: De Guyter. Goergen, M., & Renneboog, L. (2004). Shareholder Wealth Effects of European Domestic and Cross-border Takeover Bids. European Financial Management 10(1), 9-45. Golden, B., & Zajac, E. (2001). When will boards influence strategy? inclination × power = strategic change. Strategic management journal, 22(12), 1087-1011. Goodstein, J., Gautam, K., & Boeker, W. (1994). The effects of board size and diversity on strategic change. Strategic management journal, 15(3), 241-250. Gorton, G., Kahl, M., & Rosen, R. (2009). "Eat or Be Eaten: A Theory of Mergers and Firm Size. The Journal of Finance, 64(3), 1291-1344. Goyal, V. K., & Park, C. W. (2002). Board leadership structure and CEO turnover. Journal of Corporate Finance, 8(1), 49-66. Hamel, G. (2018). Decision Making in Publicly Traded Vs. Private Companies. Retrieved from Chron: https://smallbusiness.chron.com/decision-making-publicly-traded-vs-private- companies-36238.html Harford, J. (1999). Corporate cash reserves and acquisitions. Journal of Finance, 54(6), 1969- 1997. Haslam, S., & Ellemers, N. (2005). Social Identity in Industrial and Organizational Psychology: Concepts, Controversies and Contributions. International Review of Industrial and Organizational Psychology, 20, 39-118. Hendry, K., & Kiel, G. C. (2004). The Role of the Board in Firm Strategy: integrating agency and organisational control perspectives. Corporate governance: an international review, 12(4), 500-520. Hermalin, B. E., & Weisbach, M. S. (1998). Endogenously Chosen Boards of Directors and Their Monitoring of the CEO. The American Economic Review, 88(1), 96-118.

Huber, C., & O’Rourke, S. (2017). How to accelerate gender diversity on boards. Retrieved from McKinsey: https://www.mckinsey.com/featured-insights/leadership/how-to-accelerate- gender-diversity-on-boards Huse, M. (2007). Boards, Governance and Value creation. United Kingdom: Cambridge University Press. IMAA. (2019). M&A Statistics by Transaction Type. Retrieved from imaa-institute: https://imaa- institute.org/m-and-a-statistics-transaction-type/ Jemison, D., & Sitkin, S. (1986). Corporate Acquisitions: A Process Perspective. The Academy of Management Review, 11(1), 145-163. Jensen, M. (1986). Agency cost of free cashflow, corporate finance, and takeovers. American Economic Review, 76(2), 323-329. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. Jensen, M., & Ruback, R. (1983). The Market for Corporate Control: The Scientific Evidence. The Journal of Financial Economics, 11(1-4), 5-50. Jungmann, C. (2006). The Effectiveness of Corporate Governance in One-Tier and Two-Tier Board Systems – Evidence from the UK and Germany –. European Company and Financial Law Review, 3(4), 426-474. Kavanagh, M., & Ashkansay, N. (2006). The Impact of Leadership and Change Management Strategy on Organizational Culture and Individual Acceptance of Change during a Merger. British Journal of Management, 17(1), 81-103. Kenneth, L., Sukesh, P., & Mengxin, Z. (2009). Determinants of the Size and Composition of US Corporate Boards: 1935-2000. Financial Management, 38(4), 747-780. Kini, O., Kracaw, W., & Mian, S. (1995). Corporate takeovers, firm performance, and board composition. Journal of Corporate Finance, 1(3-4), 383-412. Kitching, J. (1974). Winning and Losing with European Acquisitions. Harvard Business Review, 52(2), 124-136. Knoll, S. (2008). Cross-Business Synergies: A Typology of Cross-Business Synergies and a Mid-range Theory of continuous Growth Synergy Realization. St. Gallen: University of St. Gallen. Krug, J. A. (2009). Mergers and acquisitions: Turmoil in top management teams. New York: Business Expert Press. Krug, J. A., & Hegarty, H. W. (2001). PREDICTING WHO STAYS AND LEAVES AFTER AN ACQUISITION: A STUDY OF TOP MANAGERS IN MULTINATIONAL FIRMS. Strategic Management Journal, 22, 185-196. Krug, J. A., Wright, P., & Kroll, M. J. (2014). Top management turnover following mergers and acquistions: solid research to date but still much to be learned. The Academy of Management Perspectives, 28(2), 147-163. Krug, J., & Aguilera, R. (2005). Top Management Team Turnover in Mergers and Acquisitions. Advanced in Mergers & Acquisitions, 4, 121-149. Kuipers, D., Miller, D., & A.Patel. (2009). The Legal Environment and Corporate Valuation: Evidence from Cross-border Takeover. International Review of Economics & Finance, 18(4), 552-567. Kusewitt, J. J. (1985). An Exploratory Study of Strategic Acquisition Factors relating to Performance. Strategic Management Journal, 6(2), 151-170. Lajoux, A. R. (2015). Role of the Board in M&A. Retrieved from Harvard Law School Forum on Corporate Governance and Financial Regulation: https://corpgov.law.harvard.edu/2015/09/07/role-of-the-board-in-ma/ Lawrence, G. (2017). Can Board of Directors Own Stocks by Law? Retrieved from Bizfluent: https://bizfluent.com/info-12062237-can-board-directors-own-stocks-law.html Levy, H., & Sarnat, M. (1970). Diversification, Portfolio Analysis, and the Unease case for Conglomerate Mergers. Journal of Finance, 25(4), 795-802. Li, Y., & Aguilera, R. V. (2008). Target director turnover in acquisitions: A conceptual framework. Corporate Governance, 16(6), 492-503.

Lord, N. (2019, January 23). What is SOX compliance? Retrieved from Digitalguardian: https://digitalguardian.com/blog/what-sox-compliance Lubatkin, M. (1983). Merger and the Performance of the Acquiring Firm. Academy of Management Review, 8(1), 218-225. Lubatkin, M. (1987). Merger Strategies and Stockholder Value. Strategic Management Journal, 8(2), 39-53. Lubatkin, M., Schweiger, D., & Weber, Y. (1999). Top management turnover in related M&A's: An additional test of the theory of relative standing. Journal of Management, 25(1), 55- 73. Malette, F., & Goddard, J. (2018). Why Companies Are Using M&A to Transform Themselves, Not Just to Grow. Retrieved from Harvard Business Review: https://hbr.org/2018/05/why-companies-are-using-ma-to-transform-themselves-not-just- to-grow Mallin, C. A., & Michelon, G. (2011). Board reputation attributes and corporate social performance: an empirical investigation of the US Best Corporate Citizens. Accounting and Business Research, 41, 119-144. Malmedier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. Journal of Finance, 60(6), 2661-2700. Malmedier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market's reaction. Journal of Financial Economics, 89(1), 20-43. Martynova, M., & Renneboog, L. (2008). A Century of Corporate Takeovers: What we have learned and where do we stand? Journal of Banking & Finance, 32(10), 2148-2177. Martynova, M., & Renneboog, L. (2011). The Performance of the European Market for Corporate Control: Evidence from the 5th Takeover Wave. European Financial Management 17(2), 208-259. Masulis, R., Wang, C., & Xie, F. (2007). Corporate Governance and Acquirer Returns. Journal of Finance, 62(4), 1851-1889. McGrath, J. (2009). How CEOs work. Retrieved from Howstuffworks: https://money.howstuffworks.com/ceo.htm Mcnulty, T., & Pettigrew, A. (1999). Strategists on the board. Organization Studies, 20(1), 47- 74. Moeller, S., Schlingemann, F., & Stulz, R. (2005). Wealth destruction on a massive scale? A study of acquiring-firm returns in the recent merger wave. Journal of Finance, 60(2), 757-782. Mohlmann, B. (2012). Hostile Takeovers: The Long Term Effect on Shareholder Value of Acquiring Companies. Rotterdam: Erasmus University Rotterdam. Montgomery, C., & Wilson, V. (1986). Mergers that last: A predictable pattern? Strategic Management Journal, 7, 91-96. Mulherin, J., & Boone, A. (2000). Comparing Acquisitions and Divestitures. Journal of Corporate Finance, 6(2), 117-139. Murray, J. (2018). Public Company vs. Private Company - What's the Difference? Retrieved from The balance small business: https://www.thebalancesmb.com/public-company-vs- private-company-what-s-the-difference-398422 Nahavandi, A., & Malekzadeh, A. (1988). Acculturation in Mergers and Acquisitions. Academy of Management Review, 13(1), 79-90. NCVO Knowhow. (2018). Financial responsibilities of the board. Retrieved from NCVO Knowhow: https://knowhow.ncvo.org.uk/governance/board-responsibilities/financial- responsibilities-of-the-board# Ness, A. (2014). An Overview of the Different Types of Mergers and Acquisitions. Retrieved from Johnsons Corporate: https://johnsonscorporate.com.au/an-overview-of-the- different-types-of-mergers-and-acquisitions/ Pearce, J. A., & Zahra, S. A. (1991). The relative power of ceos and boards of directors: Associations with corporate performance. Strategic Management Journal, 12(2), 135- 153.

Pearce, J., & Jr, R. B. (2004). Hostile Takeovers Defenses that Maximize Shareholders Wealth. Business Horizons, 47(5), 15-24. Piesse, J., Lee, C., Lin, L., & Kuo, H. (2013, June). Merger and Acquisition: Definitions, Motives, and Market Responses. In Encyclopedia of Finance (pp. 541-554). Bosten, MA: Springer. Retrieved from Mckinsey: https://www.mckinsey.com/client_service/organization/latest_thinking/~/media/D74F0B9 DCDAB4EAE918D2D578E7C7AF7.ashx Pitts, R. (1976). Diversification Strategies and Organizational Policies of Large Diversified Firms. Journal of Economics and Business, 28(1), 181-188. Platt, E. (2018). Global M&A activity hits new high. Retrieved from Financial Times: https://www.ft.com/content/b7e67ba4-c28f-11e8-95b1-d36dfef1b89a Plessis, J. J., Großfeld, B., Saenger, I., & Sandrock, O. (2012). An Overview of German Business or Enterprise Law and the One-Tier and Two-Tier Board Systems Contrasted. Berlin: Springer. Price, N. (2017). Sitting on a Private vs. a Public Board: Is It Really That Different? Retrieved from BoardEffect: https://www.boardeffect.com/blog/sitting-private-vs-public-board- really-different/ Protiviti. (2016). 10 Keys to Effective Board Oversight of M&A. Retrieved from Protiviti: https://www.protiviti.com/US-en/insights/bpro92 Raheja, C. G. (2005). Determinants of Board Size and Composition: A Theory of Corporate Boards. Journal of Financial and Quantitative Analysis, 40(2), 283-306. Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59(2), 197- 216. Rose, J. M., Mazza, C., Norman, C. S., & Rose, A. M. (2013). The Influence of Director Stock Ownership and Board Discussion Transparency on Financial Reporting Quality. Accounting, Organizations and Society, 38(5), 397-405. Ross, S., Westerfield, R., & Jaffe, J. (2004). Corporate Finance 6th Edition . New York: Mcgraw- Hill. Rowe, W. G., & Rankin, D. (2002). INSIDERS OR OUTSIDERS: WHO SHOULD HAVE MORE POWER ON A BOARD? Retrieved from iveybusinessjournal: https://iveybusinessjournal.com/publication/insiders-or-outsiders-who-should-have-more- power-on-a-board/ Ruback, R. S. (1988). An Overview of Takeover Defenses, in Mergers & Acquisitions. Chicago: University of Chicago Press. Rumelt, R. (1982). Diversification Strategy and Profitability. Strategic Management Journal, 3, 359-369. Ruud, J. A., Näs, J., & Tortorici, V. (2007). Preempting Hostile Takeovers. Retrieved from Mckinsey & Company: https://www.mckinsey.com/business-functions/strategy-and- corporate-finance/our-insights/preempting-hostile-takeovers Schoenberg, R. (2000). The Influence of Cultural Comptability Within Cross-border Acquisitions: A Review. Advances in Mergers and Acquisitions, 1, 43-59. Schoenberg, R. (2006). Measuring the Performance of of Corporate Acquisitions: An Emperical Comparison of Alternative Metrics. British Journal of Management, 17(4), 361-370. Schonlau, R., & Singh, P. V. (2009). Board Networks and Merger Performance. Washington: Research Showcase @ CMU. Scott, J. (1977). Bankruptcy, Secured Debt, and Optimal Capital Structure. The Journal of Finance, 32(1), 1-19. Sephiha, M. (2018, December 28). Dealmakers sluiten voor 23 miljard euro overnames. Retrieved from De Tijd: https://www.tijd.be/ondernemen/financiele-diensten- verzekeringen/dealmakers-sluiten-voor-23-miljard-euro-overnames/10082379.html Seth, A., Song, K., & Pettit, R. (2000). Synergy, Managerialism or Hubris? An Emperical Examination of Motives for Foreign Acquisitions of U.S. Firms. Journal of International Business Studies, 31(3), 387. Shah, P., & Arora, P. (2014). M&A Announcements and their Effect on Return to Shareholders: An Event Study. Accounting & Finance Research, 3(2), 170-190.

XII

Shleifer, A., & Vishny, R. W. (1997). A Survey of Corporate Governance. Journal of Finance, 52(2), 737-783. Shrivastava, P. (1986). Postmerger Integration. Journal of Business Strategy, 7(1), 65-76. Singh, H., & Montgomery, C. (1987). Corporate Acquisition Strategies and Economic Performance. Strategic Management Journal, 8(4), 377-386. Solomon, J. (2007). Corporate governance and accountability. England: John Wiley & Sons. Sridharan, U., & Reinganum, M. (1995). Determinants of the Choice of the Hostile Takeover Mechanism: An Empirical Analysis of Tender Offers and Proxy Contests. Financial Management, 24(1), 57-67. Stahl, G., & Voigt, A. (2008). Do Cultural Differences matter in Merger and Acquisitions? A Tentative Model and Examination. Organization Science, 19(1), 160-176. Steiner, P. (1975). Mergers: Motives, Effects, Policies. Ann Arbor, MI: University of Michigan Press. Stiles, P. (2002). The Impact of the Board on Strategy: An Empirical Examination. Journal of Management studies, 38(5), 627-650. Stuart, T., & Yim, S. (2010). Board interlocks and the propensity to be targeted in private equity transactions. Journal of Financial Economics, 97(1), 174-189. Sudarsanam, S., & Mahate, A. (2006). Are Friendly Acquisitions too bad for Shareholders and Managers? Long Term Value Creation and Top Management Turnover in Hostile and Friendly Acquirers. British Journal of Management, 17(1), 7-30. Suvanto, L. (2018). Should a Board Have a Reputation? Retrieved from Harvard Law School Forum on Corporate Governance and Financial Regulation: https://corpgov.law.harvard.edu/2018/08/09/should-a-board-have-a-reputation/ Tang, J. (2017). CEO duality and firm performance: The moderating roles of other executives and blockholding outside directors. European Management journal, 35(3), 362-372. Tauseef, S., & Nishat, M. (2014). Wealth Effect of Mergers & Acquisitions in emerging markets: A case of Pakistan's Banking Sector. Business Review, 9(2), 24-39. Tosi, H. L., Brownlee, A. L., Silva, P., & Katz, J. P. (2003). An Empirical Exploration of Decision- making Under Agency Controls and Stewardship Structure. Journal of Management studies, 40(8), 2053-2071. Trautwein, F. (1990). Merger Motives and Merger Prescriptions. Strategic Management Journal, 11(4), 283-295. Tricker, R. (1994). International Corporate Governance: Text, Readings and Cases. Singapore: Prentice Hall. Tripathi, A. N., & Maheswari, U. (2003). Shares with Differential Voting Rights: A Legal and Economical Analysis. Student Bar Review, 15, 74-89. Van den Berghe, L., & Baelden, T. (2005). The Monitoring Role of the Board: one approach does not fit all. Corporate Governance: an international review, 13(5), 680-690. Walter, G. (1985). Culture Collisions in Mergers and Acquisitions. Beverly Hills: Sage Publications. Weston, J. F., & Weaver, S. C. (2001). Mergers & Acquisitions. New York: Mcgraw-Hill. Xie, X., Cai, W., Lu, W., Liu, L. Y., & Takumi, A. (2009). Internal Corporate Control and the Dynamics of Post-Acquisition Boards: Evidence of U.S. Life Insurers. International Journal of Business, 21, 1-24. Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185-211. Zuehlke, J. (2018). The Differences Between Serving on Public and Private Company Board of Directors. Retrieved from Cardinal Board Services: https://cardinalboardservices.com/blog/the-differences-between-serving-on-public-and- private-company-board-of-directors/

XIII

Appendix 1: List of Variables

List of Dependent Variables Table Dependent Variable Definition Dummy variable which equals 1 if a director, seating in the board of the acquiring company, Table 17: BLR: Acquiring Company Retained Acquiring was retained and received seat in the new board and 0 otherwise Dummy variable which equals 1 if a director, seating in the board of the target company, Table 19: BLR: Target Company Retained Target was retained and received seat in the new board and 0 otherwise Dummy variable which equals 1 if a director, seating in the board of one of the merging Table 21: BLR: Merging Companies Retained Merger companies, was retained and received seat in the new board and 0 otherwise Dummy variable which equals 1 if a CEO, Table 23: Chi-Square Test: CEO seating in the board of the target company, Target CEO Retained Duality was retained and received seat in the new board and 0 otherwise Dummy variable which equals 1 if 0% of the directors of the target board was retained and Table 25: BLR: Importance of Deal Retained Target (%) equals 0 if more than 0% of the directors of the target board was retained and received a seat in the new board

List of Test Variables Test Variable Definition Dummy variable which equals 1 if a director, seating in the board of one of Insider/Outsider the companies involved, is an outsider and 0 otherwise Dummy variable which equals 1 if a director, seating in the board of one of Board Connections the companies involved, claims directorship in companies different than these involved in the M&A deal we do research on and 0 otherwise Ratio of the M&A deal value to the total sales of the acquiring company the Relative Deal Importance year before the M&A deal Dummy variable which equals 1 if the CEO of the target company is also CEO Duality Target chairman of the board and 0 otherwise

List of Control Variables Control Variable Definition Gender Dummy variable which equals 1 if director is a male and 0 otherwise

Dummy variable which equals 1 if M&A deal was made between 2 U.S. Deal companies based in the U.S. and 0 otherwise

Dummy variable which equals 1 if the M&A deal could be defined as a deal Medical Industry in the Medical Industry and 0 otherwise

Dummy variable which equals 1 if the M&A deal could be defined as a deal Energy Industry in the Energy Industry and 0 otherwise

Dummy variable which equals 1 if the M&A deal could be defined as a deal ICT & Software Industry in the ICT & Software Industry and 0 otherwise

XIV

Dummy variable which equals 1 if the M&A deal could be defined as a deal Telecommunication Industry in the Telecommunication Industry and 0 otherwise

Dummy variable which equals 1 if the M&A deal could be defined as a deal Banking Industry in the Banking Industry and 0 otherwise

Dummy variable which equals 1 if the M&A deal could be defined as a deal Consumer Goods Industry in the Consumer Goods Industry and 0 otherwise