Analysis of a Merger from a Governance Perspective: The Case of Abitibi-Consolidated and Donohue

By André, Paul; Magnan, Michel; St-Onge, Sylvie | Canadian Journal of Administrative Sciences, June 2008 | Go to article overview

Analysis of a Merger from a Governance Perspective: The Case of Abitibi-Consolidated and Donohue


André, Paul; Magnan, Michel; St-Onge, Sylvie, Canadian Journal of Administrative Sciences


Abstract

Adopting a governance perspective, this study analyzes the merger between closely-held Donohue Inc. and widely-held Abitibi-Consolidated Inc. Findings suggest that the absence of a controlling shareholder and weak board governance at Abitibi might explain both (a) its executives' interests in the transaction and (b) its CEO's compensation increase despite underperformance. Second, an intergeneration shift of control at Quebecor (Donohue's parent company) led to a strategic reorientation that (a) transformed Donohue into a target and (b) insured that Donohue's executives had incentives to pursue a deal. Finally, Donohue's noncontrolling shareholders benefited from the transaction while Abitibi shareholders experienced wealth reduction. The merger's aftermath provides some counter evidence regarding blockholders' power in widely-held firms. Copyright © 2008 ASAC. Published by John Wiley & Sons, Ltd.

JEL classifications: G14; G32; G34

Keywords: merger, managerial compensation, governance, dual class shares, pyramid structure

Résumé

Cette étude analyse, sous l'angle de la gouvernance, la fusion entre Donohue Inc., société à propriété restreinte, et Abitibi-Consolidated Inc., société à propriété dispersée. Les résultats indiquent que l'absence d'un actionnaire dominant et la mauvaise gouvernance du conseil d'administration chez Abitibi pourraient expliquer (a) pourquoi ses cadres étaient en faveur de la transaction et (b) pourquoi la rémunération du PDG a augmenté en dépit de ses mauvais résultats. En outre, le changement de contrôle inter générationnel chez Quebecor, la société-mère de Donohue, a entraîné un repositionnement stratégique qui a (a) fait de Donohue une cible et (b) veillé à ce que ses cadres reçoivent des incitatifs pour poursuivre la transaction. Enfin, les actionnaires minoritaires de Donohue ont bénéficié de la transaction tandis que ceux d'Abitibi-Consolidated en ont souffert. Les événements qui ont eu lieu après la fusion jettent un doute sur le pouvoir dont disposent les actionnaires importants dans les entreprises à propriété dispersée. Copyright © 2008 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés : fusion, gouvernance, rémunération, pyramides, actionnaires sans contrôle

Prior research on Mergers and Acquisitions (M&A) shows that (a) shareholders of target firms enjoy significantly positive returns while shareholders of acquiring firms generally break even in the short term, with sharefor-share deals showing the worst returns and (b) most acquirers showing no performance improvement or in some cases, deterioration, over the medium to long term (Rankine & Howson, 2006). These findings raise questions as to whether there are specific contexts or trends underlying the initiation of M&A and its subsequent success.

We analyze the April 18, 2000, 7 billion dollar merger between Donohue Inc. (controlled by the Péladeau family via Québecor Inc.) and widely-held AbitibiConsolidated Inc. (Donohue, Quebecor, and Abitibi, thereafter).1 The transaction created the world's largest newsprint producer. We examine the transaction from the perspective of the three key stakeholders involved in corporate governance (shareholders, directors, and executives) and use a clinical and longitudinal methodological design that relies on publicly available corporate documents (annual reports, financial statements, proxy statements, directors' circulars, press releases) and media mentions (interviews, magazine or newspaper articles). The transaction was unusual as the acquirer for financial reporting purposes (Donohue) was distinct from the legal acquirer (Abitibi-Consolidated), with Abitibi-Consolidated former directors and executives eventually dominating the merged entity governance.

Conducting such an in depth study contributes to the M&A and governance literatures in a number of ways. First, while almost all prior studies examine "on average" outcomes over a large number of transactions as well as assuming an active M&A market, our study increases the understanding as to why specific deals evolve in certain ways. …

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