In a recent blog on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Matthew McCain, Stephen McKeon and Steven Davidoff Solomon analyzed 16 separate takeover laws and court decisions from 1965 through 2013 to determine the variation in takeover laws and their long-term impact on hostile takeover activity over time.
McCain et al. offer a high-level summary of the results of the study in the introduction to his blog. “Takeover laws are enacted to regulate takeover activity, and they often take the form of anti-takeover laws intended to thwart hostile takeovers. However, these laws can have the opposite effect of their intended purpose. Although they provide protection to targets, they also implicitly rule out certain defensive tactics and therefore provide protection and increased certainty for prospective hostile bidders.”
Takeover laws reduced hostile activity over time
The results of the study by McCain and his colleagues indicated the “general susceptibility to a hostile takeover peaked in 1973 and has decreased substantially since 1987. As a proportion of total M&A equal-weighted volume, hostile activity peaked immediately prior to the passage of the Williams Act in 1967 at 40% and has since declined to about 5% in 2013.”
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The authors also note that although hostile activity is a good bit less frequent today than 20 or 30 years ago, it has certainly not disappeared.
Takeover laws often have unexpected effects
McCain et al. note their results “imply that while many of these cases and pieces of legislation have influenced takeover activity, many of them have done so in a way that may not have been anticipated by the original drafters.”
As an example they point out that a company’s probability of being successfully taken over through hostile means actually went up a good bit after poison pill validation by case law and state statutes. Although most people consider poison pills to be one of the most powerful anti-takeover defenses, our results suggest that this anti-takeover strategy may give hostile bidders a “clear roadmap” regarding the hurdles to be overcome in a takeover battle. The authors highlight that the “clarity appears to benefit bidders more than targets in terms of maintaining target independence in the face of a takeover battle.”
The threat of hostile takeovers prevents entrenched management
McCain and colleagues also build a firm-level “Takeover Index” to reflect takeover susceptibility using the significant legal determinants in the hostile takeover models, and then analyze the relationship between the index and the economic outcomes for the firms involved.
The results show that in the 1965-1979 period, firm value is decreasing in takeover susceptibility. The authors note this era was rife with coercive and abusive tender offers, and led to much of the early anti-takeover legislation.
On the other hand, firm value is increasing in firm takeover susceptibility for three decades in the 1980s, 1990s, and 2000s, and this could be related to the problem of entrenched management that many modern shareholder activists are addressing. McCain et al note: “Shareholders thus appear to value the disciplinary market for corporate control, and the secular decline in hostile takeover rates in recent years may perpetuate problems of the managerial “quiet life.” To the extent that firms deploy similar defenses to thwart shareholder activism, this trend underscores the relation between takeover defenses and corporate governance.”