A Theory of Acquisition Markets: Mergers versus Tender Offers, and Golden Parachutes

Berkovitch, Elazar; Khanna, Naveen

doi:10.1093/rfs/4.1.149

Cited by 61 publications

(52 citation statements)

References 21 publications

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“…33 Knoeber (1986) and Berkovitch and Khanna (1991) attribute a similar role to golden parachutes in hostile tender o¡ers: They argue that shareholders may want to renege on implicit long-term compensation already earned but not yet received by the manager. 34 To the best of our knowledge, this role has been so far ignored by the academic literature.…”

Section: B the Roles Of Severance Paymentioning

confidence: 99%

Entrenchment and Severance Pay in Optimal Governance Structures

Almazán

Suárez

2001

SSRN Journal

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This paper explores how motivating an incumbent CEO to undertake actions that improve the e¡ectiveness of his management interacts with the ¢rm's policy on CEO replacement. Such policy depends on the presence and the size of severance pay in the CEO's compensation package and on the CEO's in£u-ence on the board of directors regarding his own replacement (i.e., entrenchment). We explain when and why the combination of some degree of entrenchment and a sizeable severance package is desirable. The analysis offers predictions about the correlation between entrenchment, severance pay, and incentive compensation.THERE ARE SUBSTANTIAL CROSS-SECTIONAL DIFFERENCES in the control exercised by corporate boards of directors. In some cases, the board can and does ¢re the CEO at will. In others, directors are e¡ectively the puppets of the CEO and exert independent power only in extreme situations. The standard view in the literature is that, ideally, shareholders should have full control of the board of directors and that any form of CEO entrenchment is necessarily undesirable. This position, however, ignores some important interactions between managerial incentive problems and shareholder activism which we explore here.Indeed a CEO's in£uence on the board frequently re£ects not so much a discretionary choice of shareholders but the endogenous accumulation of power in the hands of the incumbent CEO (Hermalin and Weisbach, 1998). Yet we challenge the view that full shareholder control of the board of directors is necessarily the most desirable governance structure.We identify a potential con£ict between inducing a CEO to improve the e¡ectiveness of his management and allowing the shareholders to bene¢t from every valuable managerial replacement.We ¢nd that the solution to the CEO's incentive problem may rest on the allocation of power in the board of directors as well as on more traditional instruments such as severance pay and incentive compensation. The key insight of our analysis is that, in THE JOURNAL OF FINANCE VOL. LVIII, NO. 2 APRIL 2003 n Almazan is from the McCombs School of Business, University of Texas at Austin, and Suarez is from CEMFI, Madrid. We are grateful to Ty Callahan, Murray Carlson, Marco Celentani, Thomas Gehrig, Rick Green, Maria Gutierrez, Gordon Hanka, David Hirshleifer, John Moore, Jorge Padilla, Bob Parrino, Ramesh Rao, Clara Raposo, David Scharfstein, and especially Sheridan Titman and two anonymous referees for their useful comments and suggestions. Any remaining errors are our sole responsibility. 519

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Section: B the Roles Of Severance Paymentioning

confidence: 99%

Entrenchment and Severance Pay in Optimal Governance Structures

Almazán

Suárez

2001

SSRN Journal

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“…Form of Tender offers, in contrast to mergers, lead to higher Expected impact is Acquisition performance (see Berkovitch & Khanna, 1991). supported (p < .10), and explains 1.8% of the variance in performance.…”

Section: Debt Levelmentioning

confidence: 98%

“…The form of an acquisition involves the nature of the offer made by an acquiring firm with the primary choices involving either a tender offer or a merger Berkovitch & Khanna, 1991). Tender offers, or proposals made directly to a target firm's shareholders, are made through public bids, while mergers, or negotiations directly with a target firm's managers, are generally initiated under a veil of secrecy.…”

Section: Form Of Acquisitionmentioning

confidence: 99%

“…Existing research has found that tender offers significantly outperform mergers (Rau & Vermealen, 1998). Berkovitch and Khanna (1991) propose that the difference in performance results from differences in the amount of information made public during a tender offer versus a merger, where the greater information disclosure in tender offers leads increased synergy. The basis of Berkovitch and Khanna's (1991) argument is that tender offers lead to greater competition for a target firm.…”

Section: Form Of Acquisitionmentioning

confidence: 99%

“…Berkovitch and Khanna (1991) propose that the difference in performance results from differences in the amount of information made public during a tender offer versus a merger, where the greater information disclosure in tender offers leads increased synergy. The basis of Berkovitch and Khanna's (1991) argument is that tender offers lead to greater competition for a target firm. However, an alternate explanation relevant to the acquisition of technology resources is that the increased information disclosure of tender offers decreases the amount of uncertainty target firm employees' experience.…”

Section: Form Of Acquisitionmentioning

confidence: 99%

See 2 more Smart Citations

Investigating the Integration of Acquired Firms in High-Technology Industries: Implications for Industrial Policy

King¹,

Driessnack²

2003

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