Do Hostile Takeovers Improve Performance? (original) (raw)
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Hostile takeovers and the correction of managerial failure
Journal of Financial Economics, 1996
This paper examines the disciplining function of hostile takeovers in the U. K. in 1985 and 1986. We report evidence of high hoard turnover and significant levels of posttakeover restructuring. Large gains are anticipated in hestile bids as reflected in high bid premiums. However, there is little evidence of poor performance prior to bids. suggesting that the high board turnover does not derive from past m ..,agerial failure. Hostile takeovers do not therefore perform a disciplining function. Instead, rejection of bids appears to derive from opposition to post-takeover redeployment of assets and renegotiation over the term of bids.
2 Hostile Takeovers as Corporate Governance ? Evidence from the Eighties 1
2010
The notion that hostile takeovers must play a key role in corporate governance, by bringing purportedly efficient financial market pressures to bear on poorly performing managers, often underlies proposals for financial sector reform. This paper tests the most influential explanation of takeovers, the free cash flow theory of debt-financed restructuring, against a comprehensive sample of large U.S. hostile takeovers from the years 1978-89. The tests provide little support for the free cash flow hypothesis: that over-retention of corporate resources, relative to investment opportunities, would distinguish targets from other companies. Firms with less debt are more likely to have been taken over. But this and closely related evidence is more consistent with the idea that the takeover and credit markets underwent a period of speculative overheating. Thus the role played by hostile takeovers in the corporate restructuring of the 1980s does not suggest that facilitating such activity sho...
Failed takeover attempts, corporate governance and refocusing
Strategic Management Journal, 2003
Hostile takeover attempts oftentimes signal that a target firm has an over-diversified and ineffective corporate strategy. What does this signal mean when takeover attempts fail? Drawing from agency theory, we argue that target firms managed by independent directory boards are likely to ignore the takeover attempt and not refocus their firms' strategy. Conversely, target firms managed by nonindependent boards are more likely to view the failed takeover attempt as a 'wake-up call' and will refocus their firms' strategy so as to preserve the firm's survival. These arguments are tested using a sample of 76 firms that were targets of failed hostile takeover attempts. Logistic regression analyses confirm the predictions. This study suggests that in the aftermath of a failed takeover attempt board of director characteristics can help predict changes in corporate strategies.
International Journal of Industrial Organization, 2002
This paper investigates the determinants of takeovers in a large sample of UK quoted companies. We focus on the channels through which the market for corporate control monitors company performance and discretionary managerial behaviour. Our results indicate that the market for corporate control disciplines poorly performing companies, and that this effect is quantitatively important: a one standard deviation increase in profitability is associated with a fall in the conditional probability of takeover of over 20%. However, we find no evidence that firms without apparent profitable investment opportunities are more likely to be taken over if managers increase investment or reduce dividends, contrary to the predictions of the free cash-flow theory of takeovers.
Do takeovers create value? : an intervention approach
Social Science Research Network, 1996
An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique , the intervention method, that extracts the market's estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder's success. Furthermore, thi...
British Journal of Management, 2006
The well-documented failure of the majority of acquisitions to create value is often identified in popular discussion with hostile acquisitions, whereas friendly acquirers seem to get a friendly press. The relative performance of friendly and hostile acquirers therefore warrants a rigorous empirical investigation. Clear evidence of superior value creation in hostile over friendly acquisitions allows us to judge the efficacy of the market for corporate control. In this article we examine the long-term shareholder wealth performance of four types of acquirers-friendly bidder, hostile bidder, white knight and hostile bidder facing a white knight or another hostile bidder. For a sample of 519 acquisitions of UK target firms during 1983-1995, we estimated the three-year postacquisition gains to acquirer shareholders and found that hostile acquirers deliver significantly higher shareholder value than friendly acquirers. We found that friendly acquirers with high stock-market ratings destroyed more value than hostile acquirers with a similar rating. Friendly acquirer top managers suffered greater job losses than those of hostile acquirers, perhaps paying the price for their inferior value-creation performance. Our study provides evidence of the superior value-creation performance of hostile acquirers and makes the case against takeover regulatory rules that may impede hostile takeovers.
Hostile Takeovers in the 1980s: The Return to Corporate Specialization
Brookings Papers on Economic Activity. Microeconomics, 1990
We examine the sample of all 62 hostile takeover contests between 1984 and 1986 that involved a purchase price of $50 million or more. In these contests, 50 targets were acquired and 12 remained independent. We use a sample of hostile takeovers exclusively to avoid using evidence from friendly acquisitions to judge hostile ones, as many studies have done. We examine such post-takeover operational changes as divestitures, layoffs, tax savings, and investment cuts to understand how the bidding firm could justify paying the takeover premium. We also examine the possibility of wealth losses by bidding firms' stockholders as the explanation for target shareholder gains.
The impact of board composition and ownership on the nature and outcome of UK takeovers
Corporate Governance: An International Review, 1998
The purpose of this paper is to provide an insight on the relationship between internal governance and the nature and outcome of UK takeovers. The paper examines the impact of board composition and leadership, managerial ownership and external shareholder control on management's attitude and eventual outcome of 331 takeover bids. We find the likelihood of a hostile reaction negatively related to the degree of managerial share ownership and positively related to target size. The likelihood of takeover success is positively related to managerial ownership. Consistent with recent research in the US, our study confirms the important role of managerial ownership in the UK takeover process.
Do Takeovers Increase Value? An Intervention Approach
1996
Abstract: An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news ...
The Motivation for Takeovers in the UK
Journal of Business Finance & Accounting, 2008
The motives for takeovers in the UK are investigated by examining the correlations between wealth gains for the target and both acquirer wealth gains and total wealth gains. The results are sensitive to whether the gains are measured over a long or short window, the method of measuring abnormal returns, and whether controls are included for the form of the bid consideration and the sign of total bid gains. There is evidence of bids motivated by synergy, but there is also evidence of the presence of hubris and weak evidence of bids with an agency motivation. Once controls for bid consideration and the sign of total gains are introduced the explanatory power of the models increases substantially and diversity of results about bid motivation also increases.