Statement on Financial Disclosures about Acquired and Disposed Businesses

Let me begin by thanking the Staff in the Division of Corporation Finance, including Division Director Bill Hinman, for their hard work in developing today’s release and for helpful briefings throughout this process.

Today’s proposal governs the financial information firms give investors relating to mergers and acquisitions, among other things. The proposal provides several necessary updates to our rules. But I’m concerned that the proposal treats mergers as an unalloyed good—ignoring decades of data showing that not all acquisitions make sense for investors. Thus, while I vote to open this proposal for public comment, I urge investors to help us engage more carefully and critically with longstanding evidence that corporate insiders use mergers as a means to advance their private interests over the long-term interests of investors.

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Mergers and acquisitions offer substantial benefits for public companies and investors, creating economies of scale and scope that make firms more efficient.[1] But research has long shown that they can also be used by executives to build empires, even if giving management more domain is not in investor interests.[2] Our disclosure rules should balance these benefits and costs, requiring information after mergers close that allows investors to hold management accountable for their mistakes. The prospect of that accountability makes management more likely to pursue only those mergers that make long-term sense for investors.

In two ways, today’s proposal ignores evidence on how corporate insiders use mergers to extract private benefits at investor expense. First, our rules historically have required certain disclosure related to the acquisition of “significant” businesses—that is, those with sufficiently large implications for the firm’s financial future to make more detailed disclosure necessary.[3] For decades, we have determined the “significance” of the merger by reference to the audited value of the acquirer’s assets according to its last-filed annual financial statements. Today’s proposal would, among other things, determine a deal’s significance based upon the market value of the acquirer’s equity.[4]

The problem with this change is that it could result in less disclosure about acquisitions made by companies whose market value is significantly different from their book value. The evidence shows that those are the mergers that are more likely to be bad deals—precisely the type of mergers for which we should require the most transparency.[5] That’s especially true in light of evidence suggesting that managers prefer to hide information about underperforming mergers in order to avoid accountability to investors.[6] So it’s not clear to me why we should change our rules to give investors less information about these deals, since doing so risks giving executives more freedom to pursue mergers that harm the long-term health of the company.

Second, the economic analysis in the release reflects a troubling trend of one-sided thinking in our rulemakings.[7] To justify today’s changes, the economic analysis goes on at length about the benefits of rolling back certain disclosures. But it says nothing about the foundational theory or evidence showing that mergers also come with substantial agency costs.[8] The failure to grapple with these costs suggests that our regulatory choices reflect one-sided advocacy rather than sound economic analysis.

For example, the release describes the obvious fact that target companies receive a substantial premium when they’re acquired.[9] But the release ignores the other half of this well-known equation: that acquiring companies’ stocks tend to take a hit upon the announcement of a merger.[10] Looking at the performance of the combined company, which is more logically—and economically—sound, shows that many mergers are not in investors’ long-term interests.[11]

Equally troubling is the release’s reliance on decades-old research, failing to engage with more recent evidence that tends to undermine to the proposal’s premise. Many of the older papers cited in today’s release suffer from well-known methodological problems.[12] Those studies also exclude evidence from the merger waves of the 1980s and 1990s—evidence that shows that many of those mergers harmed investors over the long run.[13] Ignoring that history puts investors at unnecessary risk of the harm that would come from repeating it.[14]

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Contrary to the ideological intuition evident in today’s release, mergers come with both benefits and costs. Some acquisitions create important efficiencies; others allow managers to build empires and extract value from investors. Our disclosure rules should give investors the tools to tell the difference. That’s why it’s so important that commenters come forward with detailed ideas about how this proposal can be improved in ways that will empower investors to hold executives accountable—particularly for those mergers that harm investors over the long run.

I am grateful to the Staff for their hard work on this proposal. And I look forward to hearing from commenters about how it can be improved in ways that would reflect a more balanced perspective about the implications of mergers and acquisitions for ordinary investors.