Tacit Collusion in a Spatial Model with Delivered Pricing

Received August 5, 1999; revised version received July 20, 2001     

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.     

The Disappearing Delaware Effect

Refining and extending the methodology introduced by Daines(2001), I present evidence that small Delaware firms were worthmore than small non-Delaware firms during the period 1991–1996but not afterwards. I also present evidence that larger firms,which comprise 98% of my sample by size, exhibit no Delawareeffect for any year during the period 1991–2002. Thusthe Delaware effect "disappears" when examined over time andwhen examined for firms that are economically meaningful. Thesenew contours of the Delaware effect suggest that the benefitassociated with Delaware incorporation was an order of magnitudesmaller than estimated by Daines (2001) during the early 1990s,and nonexistent by the late 1990s. The trajectory of the Delawareeffect further suggests that it cannot provide support for the"race to the top" view of regulatory competition, as some commentatorshave argued, and may in fact provide support for the "race tothe bottom" view. Finally, the findings presented here identifytwo puzzles: (1) Why did small Delaware firms exhibit a positiveDelaware effect during the early 1990s but larger firms didnot? (2) Why did this effect disappear in the late 1990s? Iidentify doctrinal changes in Delaware corporate law in themid-1990s, increased managerial incentives to sell during thisperiod, and a cohort selection effect during the 1980s as potentialexplanations.