Mergers and Takeovers

In recent years some of the nation’s largest corporations have been the object of fierce takeover battles. The effects of these battles for corporate control reach far beyond the board room. Many stand to gain or lose depending upon the outcome. Shareholders and employees, suppliers, creditors, competitors and state and local governments all have an interest in these struggles. In addition, the success of bidders in carrying out takeovers and of companies in resisting sends signals to management of other companies about their susceptibility to a takeover. It is not surprising, then, that both takeover attempts and the tactics used to thwart them have become subjects of intense controversy. A number of states have recently enacted regulations to delay and discourage takeovers, while federal legislators are considering limitations on both takeovers and takeover defenses. This paper examines the nature of the takeover controversy and some of the arguments in favor of restricting takeovers. In particular, it considers whether acquisition attempts distinguished by the opposition of target company management require more stringent regulation than acquisitions that have target management approval. The conclusion of the paper is that legislation restricting hostile takeovers is not warranted. Shareholders of hostile takeover targets enjoy substantial increases in the prices of their shares as a result of takeover attempts. These increases are as large as, if not larger than, the increases resulting from acquisitions that have target management’s approval. Those who would restrict hostile takeovers on the grounds of protecting target company shareholders have little empirical support. On the other hand, the view that hostile takeovers are attempts to remove entrenched, incompetent management also receives little sup-