Takeovers becoming Concern

Table of Contents

Chapter 1: Introduction3

Historical Background3

Purpose of the Study10

Chapter 2: Literature Review11

Corporate Governance22

Reactions to Mainstream Megamergers27

Defensive Megamergers28

Leveraged Buyouts29

Leveraged Takeovers31

The use of leveraged buyouts as a takeover defense32

Conglomerate Megamergers33

Acquiring Competitors35

Chapter 3: Methodology40

Research Design40

Data Collection Method40

Keywords41

Reliability41

Validity42

Ethical Concerns43

Chapter 4: Results and Findings45

Chapter 5: Conclusion55

References58

Chapter 1: Introduction

Historical Background

In the last decade, hostile takeovers have become prevalent in the corporate world and have generated much controversy in the economics profession and in society at large. The so-called "Chicago School" of Antitrust has offered the intellectual reasoning for a considerable loosening of antitrust laws which, particularly in the recent past, has gained the attention of both economists and journalists. The fourth wave of hostile and friendly takeovers in the US and UK has led many leaders of the business community and the public to question the desirability of takeover activity.

During the 1980s, economists and finance researchers have made strenuous efforts to understand the factors which result in takeovers. Factors identified have included: disciplining managers; rationalisation of industries. realising economic efficiency; exploitation of economies of scale; synergy gains; the acquisition of market power; diversification; the acquisition of undervalued assets; vertical integration; managerial self- interests; "the urge to merge" etc. Of course not documented in the above list are the more idiosyncratic reasons which tend to apply on a case-by-case basis. Economists tend to ignore these case specific factors in their search for stylised facts and general principles to explain broad takeover patterns and trends.

Some 40 years ago in the late 1960s, British managers suffered a rude awakening when the first hostile bids for what they saw as “their” companies were put forward in the U.K.2 Since then the U.K. has developed the most active takeover market in the world in relation to its size. At that time, however, hostile takeovers were still regarded as bad behaviour in the city. The usual cries for government help followed but, somewhat surprisingly, government seemed to have refused to regulate good takeover behaviour; instead, it came down to self-help by the financial industry. In 1968 the City Code on Takeovers and Mergers was promulgated as a piece of self-regulation. The City Code introduced rules for fair procedure, namely transparency rules, and the so-called “mandatory bid rule” that became its centrepiece. Roughly speaking, the latter imposes the obligation to acquire all shares offered if a person or company acquires one-third of voting rights in public companies, and to pay the same price to all shareholders willing to sell. The aim is to guarantee an exit route for minority shareholders in case of a change of control, and to secure equal treatment of all shareholders in substance - i.e., financially - in the case of the takeover. These measures were of some help to the incumbent management of a target company confronted with a hostile takeover because, in effect, transparency rules and especially the mandatory bid rule make takeovers more costly. However, these “advantages” were at least partly offset by the introduction of a strict neutrality principle that essentially binds the hand ...