Gender Diversity and M&A Outcomes

This episode of Dealcast looks at how gender diversity at both CEO and board-level affects mergers and acquisitions (M&A) outcomes. Joining host Julie-Anna Needham is Dr. Valeriya Vitkova, senior research fellow and course director at Bayes Business School. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you'll learn about:

• Why female CEOs and gender-diverse boards on the buy-side perform better than acquirers with all-male leadership
• How M&A deals initiated during the pandemic by female CEOs have, on average, produced better long-term results 
• Strategic differences in deal structures and targets chosen by gender-balanced boards
• What can be done for female CEOs to be better perceived in the market 

JULIE-ANNA NEEDHAM: Welcome to Dealcast the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham, a journalist who's been covering M&A for a decade. In this episode, we're looking at how gender diversity at both CEO and board level affects M&A outcomes. Joining me is Dr. Valeria Vitkova, senior research fellow and course director at Bayes Business School.

Hi, Valeria. Thank you for joining us today.

VALERIA VITKOVA: Hi. Thank you for having me.

JULIE-ANNA NEEDHAM: So could you begin by giving us an overview of the research you've been doing, please.

VALERIA VITKOVA: Yes. So this research was produced in collaboration with SS&C Intralinks. And what we wanted to look at is how female CEOs and gender diversity at the board level impact the M&A strategy of companies and how it impacts the subsequent performance of acquirers.

And we've been working on this. We've produced two major reports over the last five years, looking at very large international samples of firms. In the latest report, for example, we look at deals announced between the beginning of 2010 and the end of 2021. We've looked at large, significant transactions, those that have a minimum value of 50 million and our sample consists of 11,000 plus M&A deals.

So I think this adds to the robustness of our data and to the reliability of the results that we have produced. And specifically, what we've looked at is the long-term share price performance of companies, the long-term operating performance, looking at accounting measures. But also, we've looked at the short-term announcement reactions. So the market reaction to announcement of these major M&A deals.

JULIE-ANNA NEEDHAM: Great. So it sounds like it's a really comprehensive study. So why has there been increased scrutiny of the low level of representation of women in senior leadership positions on company boards and at CEO level. Why now?

VALERIA VITKOVA: Yeah. So I think that's a very good question. I mean, in general, what we have seen is that there has been an ESG agenda that has quickly gathered pace in recent years. And really, if you think about it, gender diversity is one of the important issues included within this ESG agenda.

And what we have seen is that not just gender, but ethnic and cultural diversity as well are becoming an increasingly important consideration for many companies. Specifically, if we think about the area of M&A, issues relating to diversity and inclusion have become more relevant in every stage of the deal process.

So particularly, if we think about the due diligence stage, where you are investigating the ESG performance of the potential targets that you want to buy. And you also want to look at what would be the impact of integrating different businesses within your own in terms of whether it will help you to progress on these goals linked to diversity and ESG in general.

And I think one of the key reasons why we have had this is because we have had evidence that shows that there are clear benefits to having more diverse leadership teams. So we have had academic studies, reports, the reports that we have published as well, that provide and send this clear message that companies that have more diverse senior leadership teams do perform better. They can generate higher value for stakeholders and for their shareholders.

JULIE-ANNA NEEDHAM: Yeah. I'd like to look into that in a bit more detail a bit later on. But can we now look at what evidence there is to show that markets are less supportive of acquisitions by female CEOs and whether there is an investor bias in the process?

VALERIA VITKOVA: What our analysis clearly shows is that having female CEOs and greater gender diversity at the board level are associated with significantly better long-term performance. And that's statistically significant. And also compared to the peers of these businesses. And given this strong association between performance and diversity that we have found, I would say we were also a bit surprised to find that the investor reaction to deals announced by female CEOs, for example, was in fact not as positive as the reaction to deals initiated by male CEOs.

So within this discrepancy that we have observed between the long-term reaction and the initial reaction to the announcements, I think what that led us to think is that there is some kind of investor bias. Whether that's conscious or unconscious is difficult to say. And I guess what makes this matter even more surprising is that from our analysis, we could not explain this more negative reaction by poor company performance following the completion of these acquisitions.

We couldn't explain this by maybe perhaps female CEOs and more gender-diverse board making poorer M&A choices or adopting poorer strategies. Because in fact, the types of strategies that tend to be adopted by these more gender-balanced leadership teams appear to have characteristics that are associated with success.

So for example, the types of targets that these gender-balanced boards would pursue and ultimately buy tends to have higher valuation, tend to have higher profitability. They tend to have higher liquidity, lower leverage. And if you take all these financial characteristics together, what you see is that these are genuinely more successful businesses, stronger businesses, which once incorporated into the acquirer's business portfolio, are likely to lead to better performance, to stronger performance.

We also found that in terms of the way that the transactions are structured in the M&A deals, there are some systematic differences as well. So for example, in terms of the amount of advice, external advice and support that female CEOs in more gender-balanced boards look for. So what we found is that when you have female CEOs in more gender-balanced boards, you tend to seek more external advice, in terms of you would have a higher number of financial and a higher number of legal advisors as well.

And so all of these characteristics are really associated with a high likelihood of being successful. And so when we look at this discrepancy between the initial reaction and then the way that the deals are structured and the performance, it does lead us to believe that perhaps, there is some bias.

JULIE-ANNA NEEDHAM: So you've covered quite a lot of it already. But why are boards with female representation more likely to outperform their all-male counterparts both over the short and longer term? And that's looking at both M&A and then more broadly, businesses with better female representation on their boards.

VALERIA VITKOVA: So we found that there are systematic differences between the types of deals that are structured by female CEOs and male CEOs and also by more gender-balanced boards and more male-dominated boards. So what we see is that these more diverse leadership teams would go for a different type of target. So those targets that have the financial characteristics that are really associated with businesses that have high growth prospects.

So these would be companies that have higher valuation. They would be more liquid. They would have lower levels of leverage. They would be more profitable businesses. So those are the type of targets that these more gender-diverse firms would go after. And then the way that they would structure the deal would be in a way, more risk-cautious approach, where you seek more external advice.

We see that female CEOs and more gender-balanced boards tend to use a higher number of financial advisors. They tend to use a higher number of legal advisors. They are more likely to also pay for these acquisitions with cash, which in general, from corporate finance theory, we know suggests that it's only when you are certain about the benefits associated with the deal. It's only when you are confident enough about the synergies that you are going to generate is when you're going to use cash as the method of payment. So it should really send a strong signal to markets when firms use cash.

Also, we found differences in terms of the types of targets. So they tend to be private, apart from the financial characteristics that I have already mentioned. So these companies that are more gender-balanced boards, they're more likely to go for private targets. And again, from corporate finance theory, there is evidence that when you go to buy private targets, you are likely to get a certain level of discount perhaps because it is more difficult to evaluate the intangible assets of the target business to value the business itself. And so because of this, you are likely to get a better price for the company that you're buying.

Also very interesting I think what we have seen during the pandemic, is that more gender-balanced boards were also more likely to use termination fees, both target and acquire termination fees. So these are like insurance contracts that would help you to mitigate some of the risks and some of the downsides associated with the transaction potentially failing.

And so I think that all these differences, if we put them together, the types of targets, the method of payment, and then seeking external advice the way that the deals are structured, I think really show a clear picture that when you have a more gender-balanced board, you are likely to consider M&A as a strategic step from lots of different perspectives. And I think that probably helps in terms of being more likely to succeed and generate greater value.

JULIE-ANNA NEEDHAM: And very briefly, just looking a bit more broadly than M&A, what evidence do you see that diversity is good for the profits of businesses.

VALERIA VITKOVA: More broadly, we have seen that companies have greater diversity in general, and this is in fact not just at the leadership level, but at any level within the organization. We see that these companies are more likely to invest larger amounts in research and development. They are more likely to focus on innovation. They are also quite likely to focus on growing the business organically, as well as through mergers and acquisitions.

So we do see some systematic differences, even if we step aside from M&A, but just look at businesses in general. So they just tend to be, I guess, more open minded in a way. So that's the research and development, the innovation that we see. It just leads us to conclude that it just makes these companies more open-minded to developing new products, new services, adopting new strategies.

JULIE-ANNA NEEDHAM: Great. Thank you. So what can be done before female CEOs are better perceived and valued by the market and wider stakeholders?

VALERIA VITKOVA: So I think that's a very good question. I think what I want to kind of stress, which I found quite important and personally quite striking is that when we look at some of the statistics published out there about the progress that we have made in terms of-- we do have, if we look at the past five years or so, there has been an increased level of representation of female leaders on company boards.

However, when we look at the actual split of this role between executive and non-executive directors, we see that the vast majority of positions that are allocated to women are non-executive. So only about, based on the latest data that I have seen, which is looking at a global sample of companies, only about 7 percent of executive positions, board-level executive positions are occupied by females.

JULIE-ANNA NEEDHAM: Which seems like a shockingly low figure.

VALERIA VITKOVA: Exactly. Exactly. And why is this important? Because if you think about when you are an executive is when you have real power, is when you command significant resources. And also is the position from which you can perhaps become a CEO. So it's like a gate holder post. So logically, I would say one key area that we should be focusing on is working towards increasing the number of women that have those executive positions.

So it's not just about window dressing and appearing that you are working towards those ESG goals, but actually, really implementing policies that can help you with that. And so then, I guess the question is how can companies practically achieve this? I mean, one area is to promote awareness. For example, they can share data on the experiences of women in their organizations. They can bring about thought-provoking speakers. They can encourage employees to share their experiences and ideas.

And also, I think, then we need to ask the question. So how do we move from increased awareness, which in a way we have already discussed that there is some increased awareness, to action. Here, I think a key area is to provide, for example, appropriate training. And I can give you some more statistics here.

So if you look at the percentages of employees that receive diversity training, it's less than 35 percent or about 35 percent. And that's based on U.S. data, which I think is probably among the developed markets when it comes to diversity. So I think there is scope to take bolder steps within this area. Linked to this awareness and training, it should be a continuous process.

So it shouldn't be just a one-off because if you think about what we're trying to change is deeply rooted biases, habits perhaps. And so to change that from a behavioral perspective, you need to continuously repeat and reshape these beliefs and ideas and keep kind of sending the message, communicating the message that diversity is generally good, generally can lead to positive outcomes.

JULIE-ANNA NEEDHAM: I could talk to you about this all day. I find it fascinating. But we've got time for one final question. What industries are leading the charge in terms of the corporates, in terms of the banks, lawyers, private equity groups?

VALERIA VITKOVA: So again, if you look at the latest statistics on this topic, we see that sectors such as industrials, real estate, technology, and energy tend to have the lowest percentage of female leaders. On the other hand, we've got sectors such as media and retail, which are among the top performers.

So there are some stark discrepancies. And I guess the key question is whether this is owing to the nature of these businesses and perhaps the fact that historically, some of these worst-performing industries have been perceived to be male-dominated. So it's like a self-perpetuating phenomenon in a way.

So I think probably one way to deal with this is to make sure that we change this perception about these industries that are more male-dominated, to get society to realize that these industries do not need to necessarily be only reserved for male employees.

JULIE-ANNA NEEDHAM: That's great. Valeria, thank you.

VALERIA VITKOVA: Thank you very much.

JULIE-ANNA NEEDHAM: That was Dr. Valeria Vitkova, senior research fellow and course director at Bayes Business School. Thanks for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.

Download Gender Diversity and Dealmaking 2022 here.