Hostile Takeovers in the 1980s: The Return to Corporate Specialization

Abstract

HOSTILE TAKEOVERS invite strong reactions, both positive and negative, from academics as well as the general public. Yet fairly little is known about what drives these takeovers, which characteristically involve significant wealth gains to target firms' shareholders. The question is where these wealth gains come from.We examine the sample of all 62 hostile takeover contests between 1984 and 1986 that involved a purchase price of $50 million or more. In these contests, 50 targets were acquired and 12 remained independent. We use a sample of hostile takeovers exclusively to avoid using evidence from friendly acquisitions to judge hostile ones, as many studies have done. We examine such post-takeover operational changes as divestitures, layoffs, tax savings, and investment cuts to understand how the bidding firm could justify paying the takeover premium. We also examine the possibility of wealth losses by bidding firms' stockholders as the explanation for target shareholder gains.The analysis of post-takeover changes is complicated because once the target and the bidding firms are merged, it becomes impossible to attribute to the target the changes recorded in joint accounting data. As a consequence, we do not use such data, but rather focus on discussion in annual reports, 1OK forms, newspapers, magazines, Moody's andWe would like to thank Dennis Carlton, Eugene Fama, Kenneth Frenchy, Gregg Jarrell, Michael Jensen, Steve Kaplan, Rene Stulz, and Lawrence Summers for comments and the Bradley Foundation for financial support. Brookings Papers: Microeconomics 1990Value Line reports, and other such sources. Our approach is similar to the one recently employed by Bhide (1989). The advantage of this design is that we can attribute the changes we examine, such as layoffs and selloffs, to the target firm. The disadvantage is that most changes we examine are biased downward because some may not be reported.Our calculations suggest that, on average, taxes and layoffs each explain a moderate fraction of the takeover premium. Layoffs, which disproportionately affect high-level white-collar employees, explain perhaps 10-20 percent of the average premium, although in a few cases they are the whole story. Tax savings are usually somewhat smaller than savings from layoffs (although they are significant in a larger number of cases), since debt is typically repaid fairly fast. But tax reductions are very large in management buyouts, acquisitions by partnerships, and acquisitions by firms with tax losses. Large investment cuts occur infrequently in our sample, and do not appear to be an important takeover motive. Wealth declines of the bidding firms' shareholders, similarly, while important in a few cases, are usually small and cannot be a systematic source of target shareholders' gains.Our most significant finding is that most hostile takeover activity results in allocation of assets to firms in the same industries as those assets. In most hostile takeovers, the bidding firm is in the same business as, or a business closely related ...

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