The fifth article of our Winter issue, examines how, since the boom in takeovers in the 1980s, research in both law and financial economics has debated the role of takeover impediments such as poison pills, staggered boards, and state antitakeover laws. Have these impediments entrenched target management to the detriment of shareholders? Or have they increased the bargaining power of target boards of directors and left shareholders, if not better off, then at least unharmed?
In their study published recently in the Journal of Corporate Finance, the authors provide new answers to these questions with a detailed analysis of takeover competition during the period 1981 through 2014. Using a random sample of 388 completed and withdrawn deals from this 34-year period, the authors begin by confirming the already well-documented increase in the use of takeover impediments over time. They then report evidence that takeover competition has not declined during this period.
First of all, takeover premiums—the average percentage over market paid by acquirers to consummate transactions—have remained steady over time. Second, and the most striking of the authors’ findings, is that the corporate auction process has “gone underground” since the 1980s. Although we now see fewer hostile attempts and publicly reported takeover bidding contests, the amount of competition for targets has remained largely unchanged when one takes account of “private” as well as public auctions—that is, contests that, as the authors discovered, included unidentified bidders.
The authors view such a fundamental change in the takeover auction process as a response to the widespread growth of takeover impediments. In this sense, as Bill Schwert commented years ago, “hostile takeovers are less about shirking target management than about the bargaining tactics of targets and bidders.” Or as the authors put it, “the greater bargaining power provided by state laws and other takeover impediments has changed the manner in which takeover auctions are conducted,” but without greatly affecting the goal of economic efficiency that such transactions are designed to help bring about.
Authored by Tingting Liu and Harold Mulherin