Over the past years, antitakeover measures have changed and reached new levels of hostility. And it was accompanied by different innovations as well. These measures can be divided into two, preventative and active measures. To reduce the possibility of a financially successful hostile takeover, there are preventative measures put in place.
On the other hand, there are also what’s referred to as active measures. These active measures are employed only after a hostile bid has already been attempted.
There are two different types of preventative antitakeover measures. This includes poison pills. This type of preventative antitakeover measure refers to the securities issued by a potential target. This is done so the firm would look like a less valuable venture in the eye of a hostile bidder and corporate charter amendments.
Management Entrenchment Hypothesis
The management entrenchment hypothesis proposes that non-participating stockholders have less wealth. When management takes actions to deter attempts to take control of the corporation. This concept states that corporate managers aim for the maintenance of their positions by using active and preventative corporate defenses. This theory also asserts that stockholder wealth declines due to a firm’s stock reevaluation by the market
Stockholder Interests Hypothesis
Meanwhile, the shareholder interest hypothesis is also referred to as the convergence of interest hypothesis. It states that stockholder wealth rises when management takes actions to prevent changes in control. It is considered a cost-saving when the management needs not devote resources to preventing takeover attempts. This also shows that antitakeover defenses can be utilized for making the most out of shareholder value through the bidding process. Management can assert that it will not withdraw the defenses until it gets an offer that is in the shareholder’s interests.
Effects on Wealth of Interest Hypothesis
The wealth effects on shareholders of the different antitakeover defenses. Both preventative and active, are analyzed in the lenses of the two competing hypotheses. If the installation of given antitakeover defense results in a decline in shareholder wealth, then it lends support to the management entrenchment hypothesis. But if shareholder wealth increases after the defense have been implemented, the shareholder interests hypothesis gains credence.
Support Research Interest Hypothesis
In a study by Mork, Shleifer, and Vishny, the validity of the two opposite hypotheses were examined separately from a consideration of antitakeover defenses. They took into account the entrenchment of managers as well as other important factors like management’s tenure with the company. personality, and their status as a founder.
Other factors like the presence of a large outside shareholder or an active group of outside directors were also considered. It also examined the relationship between Tobin’s q, the market value of all a company’s securities divided by the replacement costs of all assets. As a dependent variable, and the shareholdings of the board of directors in a sample of 371 of the Fortune 500 firms in 1980. Results show that Tobin’s q rises as ownership stakes rise. While a positive relationship was not uniform in that it applied to ownership percentages between 0% and 5%. Same to those above 25%, a negative relationship applied for those from 5% to 25%.
This positive correlation except for those between 5% and 25% supports the shareholder interest hypothesis. Because the higher the ownership percentage, the higher the entrenchment. This, then, whose association with higher values of securities except for the intermediate range of 5% to 25%. The researchers did not provide enough evidence of the shareholder interest hypothesis. But recent support by Straska and Waller shows how companies with low bargaining power can improve their position and shareholders’ potential gains through antitakeover.
The Right to Resist in the US vs Other Countries
Much leeway in resisting hostile bids provided by US laws to the boards of directors of US companies. Under the law, boards can resist as part of what they consider as their fiduciary responsibilities. However, there is a different situation in other countries. Other areas like Great Britain, the Eurozone, and Canada have laws that are more shareholder rights-oriented. And also boards are more limited in the defensive measures they are able to take. The laws here are more in favor of offers being made to shareholders directly and letting them decide. Meanwhile, in the United States, the laws let directors exercise their right to dictate what is best for shareholders. When boards are too close to entrenched managers, this can work against shareholders’ interests.
Takeover Defenses Life Cycle effects
The estimation of takeover protections frequently changes over the life of a firm. In the initial post-IPO years, takeover protections can solidify the bond between the company and significant partners. For instance, Johnson, Kang, and Yi report that 65% of IPO firms report at least one enormous customer.
In a study of over 2000 companies from 1997-2011 by researchers Johnson, Karpoff, and Yi. It was found that on average, firms had 2.42 defenses in place at the time of the IPO. However, this average increase at 0.67 defenses during the next 10 years that followed. The results also show that 90% of the companies in their sample never removed any of these defenses over this time. This means that such defenses are “sticky”. They also noted in their study that early in the companies’ public lives. The takeover defenses implemented were related to firm value increases. Meanwhile, the opposite was the case in a public company’s life later on. This may imply that such defenses might outlive their value as public companies age.
Preventative Anti Takeover Measures
These kinds of antitakeover measures are very typical in America. In fact, most of the fortune 500 companies have considered. And developed a plan of defense in case the company becomes a target of a hostile bid. It can be used as an action of the potential target. This means having a defensive strategy developed and a defense team selected, such as an outside law firm. Investment bankers, proxy solicitors, and a public relations firm. This group ideally meets and outlines strategies they will implement in case of an unwanted bid. This strategy should be revisited based on changes in the M&A arena as well as other changes, such as industry M&A trends.
© Image credits to Steve Johnson