IV Economic impact of contested takeoverstakeovers
1. Introduction
IV Economic impact of contested
IV. Economic impact of contested takeovers
takeovers have given rise to more controversy and are, therefore, more difficult to tackle.
In the following we will focus on the various aspects of contested takeovers, looking at the effects that takeovers have on the different enti
ties or groups of persons.
2.2. The impact on target-shareholders. The empirical studies regarding the effect on the value of the shares of the target-company upon the oc
currence of a takeover attempt create a consistent picture. Almost all studies show that the response to the announcement of a takeover attempt is a substantial increase in the price of the target-shares. This is most likely connected to the fact that acquirors virtually always offer large premiums over the pre-announcement market price.
In a study of 56 “hostile” tender offers in the years 1975-83, Edward S.
Herman and Louis Lowenstein have found that winning bidders paid an average premium over the pre-announcement market price of about 80 percent.1
In a study of 33 companies that faced “hostile” takeover threats in the period 1969-1983 Larry Dann and Harry DeAngelo found that the
“hostile” bidder’s initial bid entailed a cash premium of 56.51 percent above the market price which prevailed 41 days before the takeover at
tempt was initiated.2
Michael Bradley has found that, in a sample of 161 tender offers over the period 1962-1978, the premiums averaged 47 percent above the market price at the time of the announcements of the offer.3
Richard Roll has compiled a number of studies that show the impact of a takeover bid on target-shares.4 Roll, inter alia, refers to a study by Michael Jensen and Richard Ruback where the results of about 20 papers
1 See Herman & Lowenstein, The Efficiency Effects o f Hostile Takeovers, in Knights, Raiders, and Targets p. 211 ff. at 218 ff.
2 See Larry Y. Dann & Harry DeA ngelo, Corporate Financial Policy and Corpo
rate Control, A Study o f D efensive Adjustm ents in A sset and O wnership Struc
ture, 20 Journal o f Financial Econom ics 87 (1988).
3 See M ichael Bradley, The Econom ic Consequences o f M ergers and Tender Of
fe rs, in The Revolution o f Finance (Joel M. Stem & Donald H. Chew, Jr., ed.) p.
368 ff. at 373.
4 See Richard Roll, Em pirical Evidence on Takeover Activity and Shareholder Wealth, in Knights, Raiders, and Targets p. 241 ff.
IV. Economic impact o f contested takeovers
were examined and it was shown that the price of target-shares increased by 30 percent in average in the period around the takeover event.5
In another paper by Dennis and McConnell, referred to by Roll, it was found that the average target-company’s shares increased by 8.7 percent on the day a bid was announced and the previous trading day.6
There is, in other words, basis for concluding that empirical evidence shows that shareholders of acquired companies enjoy significant economic benefits when they tender their shares and that the stock market generally responds positively when receiving information about the occurrence of a takeover bid.7
The conclusion that takeover bids provide wealth gains for target-share- holders is further underscored by the study by Dann and DeAngelo re
ferred to above. The data of their study show that if we compare the value of target-shares at a point in time 40 days before initiation of the takeover attempt with the value at the outcome, we will see an average increase in value of 42.97 percent in events where the acquiror prevailed. In events where the first (potential) acquiror pulled out in favor of an offer by a third party, the Dann-DeAngelo study shows an average wealth gain for target- shareholders of 57.58 percent. In other words, the study suggests that not only successful takeover attempts, but also attempts which turn out not to succeed but which motivate others to make bids, benefit target-sharehold- ers.
Since target-shareholders thus enjoy benefits from takeover-activity, it is natural to look at the economic effects of a defeat of a contested takeover attempt.
Three studies, by Asquith, by Bradley, Desai & Kim, and by Jarrell, have focused on the price of the target-shares in the event where a tender offer is defeated.8 These studies show, consistent with what we saw above,
5 See M ichael Jensen & Richard Ruback, The M arket fo r Corporate Control: The Scientific E vidence, 11 Journal o f Financial Econom ics 5 (1983).
6 See D ebra K. Dennis & John J. M cConnell, Corporate M ergers and Security Returns, 16 Journal o f Financial Econom ics 143 (1986).
7 See also Ellen B. M agenheim & Dennis C. M ueller, A re Acquiring-Firm Share
holders B etter O ff after an Acquisition?, in Knights, Raiders, and Targets p. 171 ff.
8 See Paul Asquith, M erger Bids, Uncertainty, and Stockholder Returns, 11 Jour
nal o f Financial Econom ics 51 (1983), M ichael Bradley, Anand Desai, & E. Han Kim, The Rationale B ehind Interfirm Tender Offers: Inform ation or Synergy? 11 Journal o f Financial Econom ics 183 (1983), and Jarrell, The Wealth Effects o f Litigation by Targets: Do Interests D iverge in a M erge? (Study referred to in an
IV. Economic impact o f contested takeovers
that the price of a target-company’s stock rises significantly (approxima
tely 15 percent, 35.5 percent, and 30 percent, respectively) compared to the rest of the market once a bid is announced. If a bid is defeated and no competing bids are made, almost the entire gain for the target-shareholders is lost.
According to the three studies, defeat o f a bid alm ost led the price o f target- shares to drop back to the pre-bid level. H owever, even in these events a small appreciation o f the value o f target-shares relative to pre-bid value could be found (Asquith: 1 percent (computed 60 trading days after the initial bid), Bradley et.
al.: 3.43 percent (one year after initial bid), and Jarrell: 9 percent (100 trading days after initial bid)).
All three studies clearly suggest that shareholders lose money when a bid is defeated.9
Related to the issues dealt with here is the question of the economic im
pact of takeover defenses. Takeover defenses provide a varied picture and can hardly be treated as a whole. We will, therefore, discuss the economic aspects of takeover defenses in chapter XI. where the various responses to takeovers are discussed in detail.
2.3. The impact on the acquiror and its shareholders. When reviewing the empirical studies regarding the impact of contested takeovers on the acquiror and its shareholders, one gets a somewhat kaleidoscopic im
pression.
Some studies, for example a study by Bradley10, a study by Asquith11, and a study by Dennis & McConnell12 indicate that the value of shares of companies that make bids for the shares of other companies tends to in
crease, although frequently not very much.
article by Frank H. Easterbrook & Gregg A. Jarrell, Do Targets Gain fro m D e
fea tin g Tender Offers?, 59 New York University Law Review 277 at 283 (1984).
9 The three studies are exam ined by Frank H. Easterbrook and Gregg A. Jarrell, see Easterbrook & Jarrell, D o Targets Gain fro m D efeating Tender Offers?, 59 New York University Law Review 277 at 283 ff. (1984).
10 See M ichael Bradley, Interfirm Tender Offers and the M arket f o r Corporate Control, 53 Journal o f Business 345 (1980).
11 See P. Asquith, M erger Bids, Uncertainty, and Stockholder Returns, 11 Journal o f Financial Econom ics 51 (1983).
12 See Dennis & M cConnell, Corporate M ergers and Security Returns, 16 Journal of Financial Econom ics 143 (1986).
IV. Economic impact of contested takeovers
Other studies, for example a study by Dodd13, a study by Firth14, and a study by Eger15, suggest that acquiror-shares tend to experience a decline in their value.
The above studies, which only represent some of the many studies that have been made in this area, do not give us any conclusive answer to our query. One of the main problems is that different methodologies have been used for the studies.
In some studies (for exam ple the A squith-study m entioned above), the perfor
mance o f the acquiror-shares before and after the acquisition is m easured against the perform ance o f shares o f com panies with sim ilar b etas.16 O ther studies (for example, the Firth-study mentioned above) m easure pre- and post-perform ance o f the acquiror against the market portfolio in 48 preceding months. M any variations have occurred. Some studies thus com pare the acquiror’s perform ance to the perform ance o f its relative industry rather than the market portfolio.
Likewise, the tim efram e within which perform ance is m easured varies among the studies. The problem s discussed here and the results o f a num ber o f other studies are discussed by Ellen B. M agenheim & Dennis C. M ueller, A re Acquir- ing-Firm Shareholders B etter O ff after an Acquisition? in Knights, Raiders, and Targets p. 171 ff. See also Richard Roll, Em pirical Evidence on Takeover A c tivity and Shareholder Wealth, in Knights, Raiders, and Targets p. 241 ff., who points out (p. 242) that irrespective o f w hether the effects on acquirors are positive or negative on an average, they are generally small in percentage terms and are less statistically significant.
A study by Herman and Lowenstein17 includes an examination of the earnings on the total capital of acquirors who made tender offers in the years 1975-83. Interestingly, this study suggests that bidders that were in
volved in acquisitions in the period 1975-1978 were, generally, perform
ing better after an acquisition than bidders that made acquisitions or bids during the early 1980’es. Bidders in 1975-1978 earned a weighted average
13 See Peter Dodd, M erger Proposals, M anagem ent Discretion and Stockholder Wealth, 8 Journal o f Financial Econom ics 105 (1980).
14 See M ichael Firth, Takeovers, Shareholder Returns and the Theory o f the Firm, 94 Q uarterly Journal o f Econom ics 235 (1980). Firth’s study is based on em piri
cal evidence from G reat Britain.
15 See C.E. Eger, A n Em pirical Test o f the Redistribution Effect in Pure Exchange M ergers, 18 Journal o f Financial and Quantitative Analysis 547 (1983).
16 Betas reflect the relative volatility o f a stock. It is a covariance o f a stock in rela
tion to the rest o f the stock market, see B arron’s Dictionary o f Finance and In
vestm ent Terms.
17 See H erm an & Low enstein, The Efficiency Effects o f H ostile Takeovers, in Knights, Raiders, and Targets p. 211 ff.
IV. Economic impact of contested takeovers
of 14.7 percent on their total capital (ROC) in the 5 years prior to the ten
der offer and 19.6 percent in the 5 years after the consummation of an ac
quisition. Prebid ROC for acquirors making bids in the period 1981-83 was approximately 20.7 and postbid was approximately 17.7.18 As pointed out by the authors, this perhaps suggests that the early bids were less speculative than what is the case for more recent developments.
Even though several studies suggest that acquirors benefit from con
tested acquisitions, other studies point in the opposite direction. The conclusion that should be made at this point is that we simply do not have sufficient evidence to evaluate, on an empirical basis, the impact on the acquiror and the shareholders of the acquiror.
2.4. Target performance after transfer of control. Above, we focused on the economic benefits that the tendering shareholders of the target- company may receive in connection with a contested takeover. Also, we had a look at the value of the acquiror after the acquisition compared to prior to the acquisition.
A third aspect, however, is the performance of the target-company after the consummation of a change of control.
Lichtenberg and Siegel have examined approximately 20,500 plants, owned by approximately 5,700 companies.19 Approximately one-fifth of the total number of plants changed owners at least once in the period 1972-1981. This enabled Lichtenberg and Siegel to compare the produc
tivity of those companies that changed owners with those companies that remained in the same hands. The study focuses on the development as to productivity in a period beginning 7 years prior to and ending 7 years after the change of ownership. The trend, according to this study, is that pro
ductivity decreases in the years prior to the change of ownership and in a period of approximately 12 months after the change of ownership, but then increases substantially and reaches a level equivalent to the level that ex
ists for companies that did not change hands. This suggests that companies that are acquired, generally, are not performing as well as other compa
nies. Moreover, it seems as if the change of ownership has a beneficial effect on productivity.
18 The study only includes ROC data up to and including 1985.
19 See Frank R. Lichtenberg & Donald Siegel, Productivity and Changes in Owner
ship o f M anufacturing Plants, Brookings Papers on Econom ic Activity No.
3/1987, p. 643 ff.
IV. Economic impact of contested takeovers
The study by Lichtenberg and Siegel is extensive and the results it indi
cates persuasive.
N evertheless, other studies have reached different conclusions. Ravenscraft and Scherer have thus m ade a study, based on a more lim ited num ber o f samples, which suggests that acquisitions have an adverse impact on productivity, see David J. Ravenscraft & F.M. Scherer, M ergers, Sell-offs, á Econom ic Efficiency p. 75 ff.
3. The debate on the economic impact of contested takeovers in the