Mergers and acquisition is an activity where one company takes over another

company and the acquired firm ceases to exist and works under the same
company name. M&A activities have considerably gone up since the past
couple of years.
The mere reason behind M&A actually taking place is pretty simple, it maybe to
increase market share of the company, growth and diversification, it may be to
increase the brand equity of the firm, technological advancement & acquiring
economies of scale and last but not the least due managerial hubris (Brown,
2006). Acquisition maybe for the benefit of the firm but are many cases which
have defaulted and lead to the loss of shareholder wealth rather than
maximization.
For Example, the Merger of Quaker and Snapple. Quaker oats being a well
known brand in the market prior to the merger became well known for its
debacle post merger. Quaker oats acquired Snapple, the fruit drink, for
whopping amount of $1.7 billion. Without understanding the target consumer of
Snapple and erroneous interpretation the company faced a loss of $1.6 million
each day (Ruesink, 2015). Another example of an ugly M&A would be of the
merger of eBay & skype. The company acquired skype for a sum of $2.6
billion. But merger turned out to be a major melt down mainly due to
misinterpretation and expectation and a huge cultural cash (Bertolucci, 2015).
Acquisitions may sometimes yield positive return but may also have a neutral
effect where the firm gains nothing and in the end what adds up is loss of
shareholder wealth (Haywark & Hamwark, 1997).
Why do organizations for an acquisition when there no gains associated to it?.
The one plausible answer to thins could be managerial hubris. Managerial
hubris is basically a self centric belief in the mind of the leaders of the firm.
They are characterised by unethical behaviours and attitude.
There has been a lot of study conducted in the past to depict the existence of
Hubris among the leaders/CEOs of companies. Various hypothetical tests have
also been conducted in light of hubristic CEOs. Jiatao-Li & Yi tang carried out a
research taking into account CEOs in china and came up to a conclusion that,
Hubristic characteristics are mainly present in top level managements
depending on the social environment and the peer group in which they exist.
The likeliness of the peers is what enhances the hubristic nature among them (Li
& Tang, 2010, pg87).
Hayward & Hamrick, based on their hypothesis, suggest that the top
management of the firm are exposed to hubris traits due to the external
environment in which they operate. According to them, media praises and
affection may elevate the confidence of the CEO leaving him infected with
hubris, they also take into account the relative pay of the leader and emphasize
that higher pay to the leader leads to greater pompousness and feeling of pride.
They also point out that negligence on the CEOs performance and overly trust

on his/her capabilities increases overconfidence. In the end, they summarise

which a fact that greater the hubris, the worse the subsequent performance of
the acquiring firm (Hayward & Hamrick, 1997, pg. 111).
Malmendier & Tate also have carried out similar research in the field of hubris.
They take into account the 477 publicly listed US firms and also the investment
decision making ability of the CEO. Their research emphasises that
overconfident and non-rational CEOs are more likely to carry out acquisitions
than the rational one which ultimately leads to lowering shareholders value
rather than increasing it with no possible benefit from the merger (Malmendier
& Tate, 2008, pg. 22-23).
Based on the above analysis it can be said the Hubris is a characterised of being
egoistic. It is where the management of the firm, mainly the CEO, believe that
they are always right and above the law, they do not into account facts and
figures and think in the most illogical and irrational way possible. Though they
have the greed for more and work towards the goal of maximising wealth of the
firm but eventually try to fulfil personal gains and motives.
Hubris is a kind of nature where the person goes against any means in order to
acquire whatever he wishes, this maybe even in terms of others expenses. Such
individuals underestimate the personalities of others and overestimate for
themselves (Smith, 2012).
In 1986, Richard Roll suggested the effects of Hubris over the acquiring firm.
Based on the hypothesis carried out, he came up to a conclusion that
managers/CEO vested with Hubristic end paying a higher premium than
required. The higher premium paid irrespective of the market speculation
ultimately leads to loss of value. Even though the gains associated with the
merger might be really small but dude to the higher price the firm ends up
loosing them (Roll, 1986).
The effects of Hubris are not just related to the higher price paid but at the same
there is a reaction in the market as well. Based on research it is also seen that
due to higher premium being paid there is a considerable decrease in the share
price of the bidding firm, the decrease is expected to be between 11-12%. It is
also noticed that the share price of the target price increases whereas of the
bidding firm tends to go down (Liu, Taffler, 2010). This can be seen in the
merger of AT&T and NCR, where during the time of negotiation due to market
fluctuation the company had made a loss of $3.9 and $6.5 billion.
It is also noticeable that due to the overconfidence of the CEO, the firm is
restricted to make any investments as well. The CEO pays a premium for the
merger as result there is loss of shareholders wealth, due to the absence of
synergies there are further losses associated to the merger as result there is
further loss which ultimately prevents the company from making any further
investments (Malmeinder and tate, 2005). Due to this the market reacts by
decreasing the share price of the company leading to further loss.

Corporate social responsibility has become a major part in the business strategy
of any company in todays, but it believed that firms with hubristic CEOs will
be reluctant to be involved in CSR activities. Tang, Chen & Shen (2014),
through studies state that highly overconfidence CEO will be less reluctant in
CSR activities as they consider themselves above the stakeholders of the firm,
but in a situation resources are scare, they are forced to engage in CSR activities
as they have to depend on other stakeholders. CSR activities basically help in
maintaining relationship with the stakeholder and also that the firm cares just
about itself but of the society as well.
They argue that this characteristic also depends on the size of the firm and
hubristic leader being overwhelmed by their own abilities that they do not find
it necessary to take into account the stakeholders of the firms. In order to
summarise this in a more practical way, they give an example of the well know
CEO, Steve jobs of apple where jobs was considered to be a highly self centred
leader with least engagement with the stakeholder and least amount of interest
in philanthropic work (Tang, Qian, Chen & Shen, 2014).