For help with a story or to find an expert: 0114 225 2811

Nigel Garrow: Worrying times for Sainsbury's shareholders

Media centre home > Find an expert> Business and management> Nigel Garrow: Worrying times for Sainsbury's shareholders

Published: 13/01/16

Mergers and acquisitions  are, on average, bad news for acquiring firm shareholders and great news for the shareholders of the firm that is about to be bought. The news last week that Sainsbury's had put in a bid for Home Retail should rightly worry Sainsbury's shareholders, whilst being a cause for celebration for Home Retail shareholders.

This is an interesting time for Sainsbury's - with it reporting a 0.4 % drop in its Christmas sales this year.

I have done extensive research showing that acquiring firm shareholders lose value during the two to three year period following an acquisition, whilst shareholders in the firm being acquired experience gains in their share price of 20% to 40% once the market becomes aware that an offer is about to be made; in some cases, as with SAB Miller, the gain can be as much as 50%.

What's more, my research has established that the length of time that a chairman and Chief Executive (CEO) have been in their positions together at the time of an acquisition will determine the success or otherwise of an acquisition.

I established that the length of time that a Chairman and CEO have been together when an acquisition has been successful is 5.5 years, whereas the average time that a Chairman and CEO have been together in unsuccessful acquisitions is 2.6 years.

The relationship between a Chairman and the CEO is vital to the successful running of a firm, and relationships built on trust typically take time to develop. The best acquirers will also have enjoyed a very positive performance during the three years prior to an acquisition, not just the year before an acquisition.

David Tyler was appointed Chairman of Sainsbury's on 1 November 2009, whilst Mike Coupe, pictured above, was appointed CEO on 9 July 2014; they have therefore been in their respective positions together for a mere 18 months which does not auger well for any significant acquisition which Sainsbury's propose to make in the foreseeable future.

So why do managers pursue acquisitions which may not be in the best interests of the shareholders?

In academic terms it is sometimes referred to as 'agency problems' that is those circumstances in which the interests of the shareholders do not coincide with the interests and time horizons of the management.

Managers in those circumstances may suffer from hubris or narcissism, a tendency to be over-confident in one's own ability and to pursue a task (or acquisition) almost in spite of the facts that may be available; sometimes this is referred to as 'gut instinct'.

A well-researched factor that contributes to difficulties with acquisitions is that the rate of staff turnover in firms acquired increases significantly following an acquisition, and often not just for the year following the acquisition but for some time thereafter. Lack of experience or instability in the acquiring firm's senior management will merely add challenges to the acquiring process for a range of stakeholders.

My research has identified five other factors which are early warning signs for stakeholders when an acquisition is being undertaken in order to assist them in determining how long they should stay with that firm.

  • The scale of increase of the CEO's remuneration in the year following the acquisition. In unsuccessful acquisitions the CEO's salary typically increases at a much faster rate than it does for successful acquisitions.
  • The acquirer's dividend payout ratio in the year of the acquisition
  • The return to shareholders during the first year following the acquisition. Typically the worst year for an acquiring firm's shareholders is the second year after the acquisition, but the first year can be a key indicator. For successful acquirers the return for shareholders in the first year is positive, but for unsuccessful acquirers the return is negative.
  • The performance of the acquirer during each of the three years prior to an acquisition, as opposed to only the year prior to the acquisition. Successful acquirers have typically had three good years prior to an acquisition.
  • Size of the consideration paid as a percentage of the acquirers' net assets. A small acquisition is more likely to be successful than a large one. In the case of the Sainsbury's acquisition the size of the acquisition relative to Sainsbury's market capitalisation may not be a problem in of itself. To divest part of what they are acquiring, if that is in fact what they are proposing, may be a challenge.

So caution must be the order of the day for Sainsbury's shareholders, with risk being a real likelihood.


The author:


"My research has established that the length of time that a chairman and Chief Executive (CEO) have been in their positions together at the time of an acquisition will determine its success."