Who benefits from take over resistance tactics?
According to the finance literature, a takeover is a process whereby a firm acquires another firm, resulting in a change of the controlling interest of the acquired firm. Takeovers can occur through acquisitions, proxy contests and going-private transactions. They can be friendly when the management of the target firm is receptive to the bidder offer or they can be hostile when target firm managers resist takeover attempts by using defensive tactics. According to Ross et al (2010), takeovers can result in change of firm policies, layoffs, terminations, or overhaul of business operations.
To analyze who benefits from a takeover resistance tactic, we should first examine the reasons or motivations of the defensive tactic by target firm managers. According to Ruback (1987), managers resist takeovers for the following reasons: Managers believe that firm has hidden values, this is due to the private information they have about the firms future prospects that is not available to the public and when managers assess the takeover bid by comparing the offer price with what they believe is the fair value of the firm (incorporating the private information) and the offer price turns out to be less, managers will oppose the offer.
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Managers believe the resistance will increase offer price, therefore, their attempt to resist slows the bid and create opportunity to an increase of the tender offer as the bidder after an initial unsuccessful friend offer, tries to buy through a tender offer and if not successful, try the auction for the firm. According to Ruback (1983) cited in Ruback (1987), the final offer price exceeded the initial offer price by 23% in 48 competitive tender offers between 1962-81.
Managers may want to preserve their jobs and positions, especially when they are ware that the bidder intends to replace the target firm’s management. Target firm managers use a variety of defensive tactics to avoid takeovers, from altering the terms of directors where managers amend charters of the firm to make takeovers more difficult; golden parachutes related to severance packages payable to managers in the event of takeover, increasing the cost of acquisition; poison pills provision that are deterrent to the acquirer diluting for example the acquirers share in the firm.
Other tactics after the company in in play include greenmail and standstill agreement, white knight and white squire, recapitalization and repurchases where managers issue debt to repurchase shares raising the market share price, making it less attractive to the bidder; exclusionary self-tenders and asset restructuring. These tactics are built by management for self-protection reasons, being severe, (blocking takeovers) or soft tactics with no substantial impact on the offer price.
However, empirical evidence shows that although manager’s defensive tactics may sometime rarely shareholders by increasing wealth, in general, these tactics do not have a positive impact in the share price of the target firm. According to DeAnglelo and Rice (1983) cited in Ruback (1987. p56-57), they found no evidence of share price reaction to adoption of corporate charters amendment when analyzing 53 firms using staggered boards as well as the effect of super majority provision. Ho (1986) cited in Ruback (1987), found no evidence of existence of abnormal return for a sample of 23 poison pills.
This conclusion is also consistent with findings of Kidder, Peabody and Company for a sample of 167 poison pills where no stock price change was observed. Evidence by Dann and DeAngelo (1983) proves that there is a negative stock price reaction with the use of standstill agreements by -4% whereas, greenmails, cause a negative stock reaction of -3%. Dann and DeAngelo (1986) cited in Ruback (1987), analyzed 20 transactions where they found that acquisitions and divestitures, reduce by 2% the share price of the target firm.
In general, empirical evidence supports the idea that manager’s defensive tactics are harmful to the target firm value. For example, Bates et al (2012) reported that Microsoft Corporation offered USD 47 billion to Yahoo in 2008, a premium above 60% however; this offer was rejected by Yahoo executives. Following Microsoft? s withdrawal of the acquisition bid, Yahoo? s shares dropped by 15%; the CEO of Yahoo was later replaced for this costly and selfish behavior.
According to Bradley et al (1988) cited in Devos (2009), companies merge to benefit from synergies. For a sample of 236 successful tender offers from 1963-1884, they noted that the equity value for the combined firms increased by 7,4% in average. Synergy is when the combined firm value exceeds the value of the acquirer and acquired firm before the acquisition. Therefore, synergy is attached to the incremental cash flows, coming from revenue enhancement, cost reduction, tax gains and reduced capital requirements.
According to Brealey (2003), acquisitions can happen in three basic forms, merger or consolidation, acquisition of stock and acquisition of assets. The merger is the incorporation of assets and liabilities of one firm by another and the acquirer maintains its name whereas the acquired firm ceases to exist. The main advantage of this method over others rely on the minimum costs incurred on mergers as they do not require the transfer of title deed of individual assets of the acquired firm to the acquiring firm which is costly provided that the merger is approved.
In addition, in the transfer of assets form according to Ross et al (2010), minority shareholders often cause problems to the majority shareholders. The acquisition of stock as we saw above, can be costly to the bidder because of the defensive tactics used by the target firm managers as an attempt to avoid the takeover. Therefore, the outcome aimed by the acquiring firm may not be achieved as the tender price may be pushed us, above the real market value of the acquired firm.