A century of corporate takeovers: What have we learned and where do we stand?

This paper reviews the vast academic literature on the market for corporate control. Our main focus is the cyclical wave pattern that this market exhibits. We address the following questions: Why do we observe recurring surges and downfalls in M&A activity? Why do managers herd in their takeover decisions? Is takeover activity fuelled by capital market developments? Does a transfer of control generate shareholder gains and do such gains differ across takeover waves? What caused the formation of conglomerate firms in the wave of the 1960s and their de-conglomeration in the 1980s and 1990s? And, why do we observe time- and country-clustering of hostile takeover activity? We find that the patterns of takeover activity and their profitability vary significantly across takeover waves. Despite such diversity, all waves still have some common factors: they are preceded by technological or industrial shocks, and occur in a positive economic and political environment, amidst rapid credit expansion and stock market booms. Takeovers towards the end of each wave are usually driven by non-rational, frequently self-interested managerial decision-making.     

Excess control,agency costs and the probability of going private in France

The current study investigates the determinants of going private (GP) in France. It contrasts a sample of 161 firms that went private between 1997 and 2009 with a propensity-score-matched sample of firms that remained public during the same period. The results indicate that, unlike for firms that remain public, the largest controlling shareholders (LCSs) of GP firms control their firms using an incommensurately small fraction of ultimate cash flow rights. This is consistent with the view that agency problems between large and minority shareholders make public firms less attractive to investors, which reduces the benefits of staying public and encourages the LCSs to take their firms private or accept takeover offers. Additional results show that GP firms have more undervalued stock prices and higher free cash flows than non-GP firms. Expected interest tax shields, low growth opportunities, and pre-GP takeover interest do not seem to affect the probability of GP.     

Limited attention,share repurchases,and takeover risk

We hypothesize that announcing open market share repurchases (OMRs) to counter negative valuation shocks reveals repurchasing firms’ lost growth opportunities or underperforming assets to potential bidders, making them more likely to become takeover targets. This also leads their investors to face higher takeover risk, a systematic risk associated with economic fundamentals that drive takeover waves, as proposed by Cremers et al. (2009). Indeed, we find that repurchasing firms tend to face higher takeover probability in the first few years following their OMR announcements, and that the increase in takeover risk can largely explain their post-announcement long-run abnormal returns documented in the literature. The increase in takeover risk is larger for smaller firms, firms with poorer pre-announcement stock performance, and those attracting more attention of market participants. Our results suggest that OMRs, which are used by many firms to counter undervaluation, could make the firms more sensitive to takeover waves and raise their cost of equity capital.     

Hostile bank takeover offers : Analysis and implications

A comparison of the financial characteristics of banks involved in hostile takeover bids with a control group of nonhostile bank mergers indicates: (1) hostile targets experience abnormal returns that are significantly greater than for the targets of nonhostile bank mergers; (2) hostile bidders experience negative abnormal returns that are insignificantly different than for bidders involved in nonhostile bank mergers; (3) hostile bank acquisition announcements produce positive net wealth effects which are larger than the wealth effects of nonhostile acquisitions; (4) a Logit regression model using financial ratios, stock price data, and ownership data is able to distinguish between hostile and nonhostile targets.     

Does corporate governance matter in competitive industries?

By reducing the threat of a hostile takeover, business combination (BC) laws weaken corporate governance and increase the opportunity for managerial slack. Consistent with the notion that competition mitigates managerial slack, we find that while firms in non-competitive industries experience a significant drop in operating performance after the laws’ passage, firms in competitive industries experience no significant effect. When we examine which agency problem competition mitigates, we find evidence in support of a “quiet-life” hypothesis. Input costs, wages, and overhead costs all increase after the laws’ passage, and only so in non-competitive industries. Similarly, when we conduct event studies around the dates of the first newspaper reports about the BC laws, we find that while firms in non-competitive industries experience a significant stock price decline, firms in competitive industries experience a small and insignificant stock price impact.     

Capital Structure and Corporate Control: The Effect of Antitakeover Statutes on Firm Leverage

We find that firms protected by "second generation" state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse. This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid. An implication is that legal barriers to takeovers may increase corporate slack.     

Takeover risk and the correlation between stocks and bonds

Existing research suggests that, for a given firm, stock returns and bond prices are positively related, and this implies a negative relation between stock returns and bond spreads. In this paper, we show how takeover risk influences this relation. Bondholders of high-rated firms can suffer losses in a takeover, particularly if the takeover is largely funded with debt, resulting in a more positive (or less negative) correlation between stock returns and bond spread changes. Consistent with this notion and based on a large sample of data covering the period from 1980 to 2000, we find that high-rated firms which are likely to be taken over have a more positive correlation between stock returns and bond spread changes, while target firms with a poison put or an indebtedness covenant have a more negative correlation. Overall, our findings have implications for the pricing and hedging of bonds and default risk based financial products such as credit default swaps.     

Modelling Takeover Likelihood

This paper employs a multinomial logit model in an attempt to better understand the motives behind takeovers. The results from the multinomial logit models show that the characteristics of hostile and friendly targets differ significantly and that these differences also vary depending on the time period under investigation. The results give some support to the disciplining role of the hostile takeover. Furthermore, conclusions based on a simple binomial logit model are likely to be misleading and result in incorrect inferences regarding the characteristics of firms subject to takeover.     

Takeover Defenses and Bargaining Power

For decades, academics have claimed that even friendly acquisitions are negotiated in the "shadow" of a hostile takeover bid. But interviews with senior M&A investment bankers provide a different picture of negotiated acquisitions. Determining which version is more representative of most deals is important because the academic assumption has been a main pillar of attempts to justify poison pills and other takeover defenses as ways of increasing the bargaining power of target companies' managements and the premiums received by their shareholders.
This article shows that takeover defenses can be justified as a value-maximizing control device in a simplified model with one buyer and one seller. But after taking account of four realities that are present in many if not most corporate M&A deals—alternatives away from the negotiating table (i.e., other potential targets), high costs of launching a hostile bid, information disparities, and managers with divided loyalties—the author demonstrates that only a fraction of friendly acquisitions are in fact negotiated in the shadow of a hostile takeover threat. This conclusion is reinforced by both empirical evidence and the commentary of M&A practitioners presented in the article.     

Failed takeovers, methods of payment, and bidder returns

This study documents bidding-firm stock returns upon the announcement of takeover terminations. On average, bidding firms that offer common stock experience a positive abnormal return, and firms that offer cash experience a negative abnormal return. The positive performance is primarily driven by bidders initiating the takeover termination. Commonstock-financed bidders earn a return not significantly different from that earned by cashfinanced bidders when terminations are initiated by the target firm. The results are consistent with the asymmetric information hypothesis, that the decision not to issue common stock conveys favorable information to the market. In addition, bidder returns at takeover termination are positively related to the amount of undistributed cash flow, supporting the free cash flow hypothesis.     

Board composition,ownership structure and hostile takeovers: some UK evidence

This paper examines the relationship between internal and external control mechanisms in a sample of hostile takeover targets and a control group of non-target firms in the UK for the period 1989–93. The paper investigates whether there are significant differences in board composition, executive ownership and external shareholder control between the two groups. We find that hostile targets are more likely to have different individuals in the roles of chairman and CEO but employ non-executives with fewer additional directorships than non-targets. Executive share ownership is significantly lower in targets, suggesting that hostile bids are more likely to be pursued when target managers possess insufficient equity either to defeat the bid or make the bid too expensive for bidders. We find some evidence that institutional and unaffiliated blockholders in smaller targets help managers defeat unwanted bids.     

Effects of takeover protection on earnings overstatements: evidence from restating firms

A staggered board can substantially protect a firm’s incumbents from takeover in either a hostile acquisition or a proxy contest. We use the existence of a staggered board as enhanced takeover protection and examine the association between staggered boards and earnings manipulation. Following a rigorous procedure to identify a sample of restating firms that overstated earnings, manually collecting data on several governance characteristics and using a matched-pairs methodology, we find that firms with staggered boards are less likely to overstate earnings. One potential interpretation of our results is that staggered boards lessen takeover threats and thus mitigate managers’ pressure to overstate earnings.     

Labor mobility and antitakeover provisions

How do firms protect their human capital? We test whether firms facing an increased threat of being acquired strengthen their antitakeover provisions (ATPs) in order to bond with their employees. We use the adoption of the Inevitable Disclosure Doctrine (IDD) by US state courts, which exogenously decreases knowledge-worker mobility, thus elevating takeover risk and reducing employee incentives to innovate. Firms respond to the IDD adoption by strengthening ATPs that defend against hostile takeovers, especially when they have greater ex-ante employee mobility and human capital and place greater importance on employee relations. We find no evidence that managers strengthen ATPs for entrenchment or takeover bargaining purposes in this setting. Our findings show that ATPs can be used to credibly commit to employees in order to protect long-term value creation.     

The Role of ESOPs in Takeover Contests

This article examines both the shareholder wealth effects of employee stock ownership plans (ESOPs) announced by firms subject to takeover pressure and the takeover incidence of targets with and without ESOPs. Although we do not find that defensive ESOPs significantly reduce shareholder wealth on average, we identify two factors—the change in managerial and employee ownership due to the ESOP and the simultaneous announcement of other defensive tactics—that are associated with negative stock price reactions. We find that ESOPs are strong deterrents to takeover. ESOP targets that are acquired earn higher returns than targets without ESOPs, but the difference is not statistically significant.     

Do takeover targets overinvest?

I examine the capital expenditures of a sample of 700 takeovertargets and firms that went private over the period 1972-1987.For the complete sample, I do not find evidence that takeovertargets increase their capital expenditures over the four yearperiod before the acquisition or that they overinvest in capitalexpenditures relative to several benchmarks. Subsample resultsprovide some evidence of overinvestment in oil and gas firmsand large firms. There is no evidence of overinvestment, however,for firms acquired in a hostile takeover or firms that wentprivate. In general, these results are not consistent with theconjecture that takeovers are motivated by the need to reduceexcess investment in capital expenditures in target firms.     

The Performance of the European Market for Corporate Control: Evidence from the Fifth Takeover Wave

This paper presents an in‐depth analysis of the performance of large, medium‐sized, and small corporate takeovers involving Continental European and UK firms during the fifth takeover wave. We find that takeovers are expected to create takeover synergies as their announcements trigger statistically significant abnormal returns of 9.13% for the target and of 0.53% for bidding firms. The characteristics of the target and bidding firms and of the bid itself are able to explain a significant part of these returns: (i) deal hostility increases the target's but decreases bidder's returns; (ii) the private status of the target is associated with higher bidder's returns; and (iii) an equity payment leads to a decrease in both bidder's and target's returns. The takeover wealth effect is however not limited to the bid announcement day but is also visible prior and subsequent to the bid. The analysis of pre‐announcement returns reveals that hostile takeovers are largely anticipated and associated with a significant increase in the bidder's and target's share prices. Bidders that accumulate a toehold stake in the target experience higher post‐announcement returns. A comparison of the UK and Continental European M&A markets reveals that: (i) the takeover returns of UK targets substantially exceed those of Continental European firms. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure in Continental Europe allow bidding firms to adopt takeover strategies enabling them to act opportunistically towards the target's incumbent shareholders.     

Director Quality and Firm Performance

Many financial economists argue that the board of directors' efficacy in the monitoring of managerial behavior depends upon the quality of the directors. Assuming that there is a link between the stock performance of target firms and the quality of their directors, we empirically categorize directors receiving additional directorships following a takeover as “above average” and “below average.” We then follow the stock performance of firms hiring new directors for three years after their hiring. We match the two categories of directors with the performance of hiring firms after a director's appointment. Accounting for other contemporaneous effects, we regress the hiring firms' post‐performance on director quality and other attributes. The results indicate that directors of “above average” quality are related to hiring firms with “above average” post‐performance.     

The role of lockups in takeover contests

We examine breakup fees and stock lockups as devices for prospective target firms to encourage bidder participation in takeover contests. Unless bidding costs for the first bidder are too high, breakup fees provide for the socially desirable degree of competition and ensure the efficient allocation of the target to the highest‐valued buyer in a takeover auction. In contrast, stock lockups permit the target firm to subsidize entry of a new bidder at the expense of an incumbent bidder. Stock lockups induce too much competition when offered to a second bidder and too little competition when offered to a first bidder. Despite their socially wasteful properties, target management would favor stock lockups, as they induce takeover competition at least cost to the target.     

Have changing takeover defense rules and strategies entrenched management and damaged shareholders? The case of defeated takeover bids

Using the Delaware Supreme Court's Time-Warner decision of July 1989 as a focal point, we study defeated takeover bids before and after July 1989 to assess the direct effects of stronger takeover impediments on takeover defense tactics used to defeat bids and the resulting shareholder wealth outcomes and managerial turnover. We find that firms that defeated takeover bids after July 1989 shifted away from the use of active takeover defenses (repurchases, special dividends, greenmail, and leverage increases). Nevertheless, shareholders of firms that defeat a takeover experienced slightly better wealth outcomes in the 1990s than in the 1980s. We also find increased managerial turnover rates after defeating a takeover bid post Time-Warner, suggesting that managers that defeat hostile takeover bids did not become more entrenched due to greater takeover impediments relative to prior years.     

Corporate Takeover Bids,Methods of Payment,and Bidding Firms' Stock Returns

This study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids. The results reveal significant differences in the abnormal returns between common stock exchanges and cash offers. The results are independent of the type of takeover bid, i.e., merger or tender offer, and of bid outcomes. These findings, supported by analysis of nonconvertible bonds, are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment.