In “mergers of equals,” target company CEOs frequently strike deals that benefit them personally but are not in the best interests of their shareholders, according to a new study by Wharton management professor Julie Wulf.

After analyzing 40 major transactions that the dealmakers described as mergers of equals, Wulf concludes that CEOs of target companies in this increasingly popular form of merger often traded away a better price for their shareholders in exchange for more job security for themselves (or possibly their employees). “Merger agreements that appoint a larger share of target directors to the post-merger board and that include CEO/chairman succession plans are associated with lower target shareholder returns,” Wulf writes in her paper, Do CEOs in Mergers Trade Power for Premium? Evidence from ‘Mergers of Equals’.

Wulf defines mergers of equals as “friendly mergers generally characterized by pre-merger negotiations between two firms of similar size that result in approximately equal board representation in the merged firm.” Some of the more recent and highly publicized examples of mergers of equals include Traveler’s Group and Citicorp, AOL and Time Warner, Viacom and CBS, Daimler-Benz and Chrysler, Dean Witter and Morgan Stanley, and Bell and GTE.

In addition to price, negotiations that take place in mergers of equals also determine post-merger corporate governance and such “social issues” as company name, location of headquarters and plans for asset-restructuring, Wulf says.

Proponents of mergers of equals, Wulf says, “claim that characteristics like retention of directors and senior managers from both firms create more value than standard merger transactions, and thus are beneficial to both sets of shareholders.”

An alternative hypothesis, however, and one supported by Wulf’s research, is that CEOs trade “‘power for premium’: Specifically, they negotiate control rights in the merged firm (both board and management) in exchange for a lower premium for their shareholders.”

As Wulf sees it, if the overall value created by the merger of equals was greater than in an ordinary merger, then higher retention of directors and senior managers might be beneficial to both sets of shareholders. But Wulf’s research found that combined stock gains on announcement of the merger are roughly the same for mergers of equals as for a matched sample of mergers of non-equals. The only difference was that in an ordinary merger, target shareholders take home a greater share of the gains. In the sample of mergers of non-equals, target shareholder announcement returns are on average 9.44%; in mergers of equals, this premium slides to 3.89%. “While acquiring shareholders may gain, the evidence suggests that target shareholders do not,” she writes.

Wulf sees misaligned CEO incentives as a possible reason for this result. She found, for example, that at the time of the merger announcement, target company CEOs in mergers of equals held a significantly smaller share of stock in their firm than the target company CEOs of mergers of non-equals, an average of 0.4% compared to 2.8%.

She also found that the likelihood of a CEO-succession agreement was actually stronger the worse the target company was doing – and the younger its CEO. “Interestingly, shared governance is more common in transactions involving larger, poorer-performing target firms managed by younger target CEOs with lower stock ownership,” Wulf says.

She theorizes that CEOs of poorly performing companies see fewer employment options outside the company and may put more effort into trying to stay on board. In addition, she says, many of the most recent mergers of equals have been in deregulated and consolidating industries – principally utilities, financial services and health services – where there are going to be progressively fewer top jobs to go around. “As these big firms combine, there aren’t as many top jobs. For younger CEOs who aren’t close to retirement, they really have a greater incentive to negotiate a position in the merged firm.”

Wulf’s analysis is based on transactions identified from the mergers and acquisitions database of Securities Data Company (SDC). She focused on mergers that took place between 1991 and 1999 and identified a final sample of 40 mergers of equals that met the following SDC criteria: The two firms publicly announced the merger as a merger of equals; both companies had approximately equal representation on the board of directors of the new company; the two firms had approximately the same pre-merger market capitalization, and the ownership of the new entity was to be split approximately 50/50 by each company’s shareholders. Then she constructed a matched sample of mergers of non-equals using several firm and transaction characteristics.

Wulf says she first became interested in this subject in the late 1980s while working as a corporate planner evaluating potential acquisitions. “It became clear to me at the time that there is a conflict of interest between what would profit an individual executive and what would profit the shareholders at large.”

On the subject of whether mergers of equals can result in “net social gains, such as protecting target company employees, the fact remains that the exchange of target shareholder premiums for post-merger shared governance is not beneficial to target shareholders,” she says.

She does, however, raise a number of alternative explanations for the lower returns. For one thing, negotiations of “mergers of equals” take longer to complete after announced than mergers of non-equals, and are also more complex, which may lead to greater skepticism about whether a deal will actually be completed. This also could hurt target returns. In addition, Wulf found fewer competing bids for target companies in the merger of equals sample; this lack of competition may have helped keep the price down.

Finally, Wulf writes, most of the mergers she studied were in industries experiencing considerable consolidation. This could dampen market response since prices may already reflect anticipation of M&A activity.

Assuming that her thesis is right, how does Wulf think that boards might discourage CEOs from dealing themselves in and their shareholders out? One suggestion is for companies to require CEOs to hold more company stock. The alternative, Wulf says, is that the “merger of equals” won’t last. “If target shareholders returns are not comparable to returns in mergers of non-equals, then I think this form of transaction will not be sustainable.”