Takeovers: Their Causes and Consequences
Michael C. Jensen
Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Journal of Economic Perspectives, Winter 1988, Vol. 2, No. 1, pp. 21-48
Economic analysis and evidence indicate that the market for corporate control is benefiting shareholders, society, and the corporate form of organization. The value of transactions in this market ran at a record rate of about $180 billion per year in 1985 and 1986, 47 percent above the 1984 record of $122 billion. The gains to shareholders from these transactions have been huge. The gains to selling firm shareholders from mergers and acquisition activity in the ten-year period 1977-86 total $346 billion (in 1986 dollars). The gains to buying firm shareholders are harder to estimate, and no one to my knowledge has done so as yet, but my guess is that they will add at least another $50 billion to the total. These gains, to put them in perspective, equal 51 percent of the total cash dividends (valued in 1986 dollars) paid to investors by the entire corporate sector in the past decade.
These corporate control transactions and the restructurings that often accompany them are frequently wrenching events in the lives of those linked to the involved organizations: the managers, employees, suppliers, customers and residents of surrounding communities. Restructurings usually involve major organizational change (such as shifts in corporate strategy) to meet new competition or market conditions, increased use of debt, and a flurry of recontracting with managers, employees, suppliers and customers. This activity sometimes results in expansion of resources devoted to certain areas and at other times in contractions involving plant closings, layoffs of top-level and middle managers, staff and production workers, and reduced compensation.
Those threatened by the changes that restructuring brings about argue that corporate restructuring is damaging the American economy, damaging the morale and productivity of organizations, and pressuring executives to manage for the short-term. Further, they hold that the value restructuring creates does not come from increased efficiency and productivity; instead, the gains come from lower tax payments, broken contracts with managers, employees and others, and mistakes in valuation by inefficient capital markets. Since the benefits are illusory and the costs are real, they argue, takeover activity should be restricted.
The controversy has been accompanied by strong pressure on regulators and legislatures to enact restrictions that would curb activity in the market for corporate control. Dozens of congressional bills in the last several years have proposed new restrictions on takeovers, but none have passed as of this writing. The Business Roundtable, composed of the chief executive officers of the 200 largest corporations in the country, has pushed hard for restrictive legislation. Within the past several years the legislatures of New York, New Jersey, Maryland, Pennsylvania, Connecticut, Illinois, Kentucky, Michigan, Ohio, Indiana and Minnesota have passed antitakeover laws. The Federal Reserve Board implemented new restrictions in early 1987 on the use of debt in certain takeovers.
In all the controversy over takeover activity, it is often forgotten that only 40 (an all-time record) out of the 3,300 takeover transactions in 1986 were hostile tender offers. There were 110 voluntary or negotiated tender offers (unopposed by management) and the remaining 3,100-plus deals were also voluntary transactions agreed to by management, although this simple classification is misleading since many of the voluntary transactions would not occur absent the threat of hostile takeover. A major reason for the current outcry is that in recent years mere size alone has disappeared as an effective takeover deterrent, and the managers of many of our largest and least efficient corporations now find their jobs threatened by disciplinary forces in the capital markets.
The market for corporate control is creating large benefits for shareholders and for the economy as a whole by loosening control over vast amounts of resources and enabling them to move more quickly to their highest-valued use. This is a healthy market in operation, on both the takeover side and the divestiture side, and it is playing an important role in helping the American economy adjust to major changes in competition and regulation of the past decade.
Number of Pages in PDF File: 45
Keywords: takeovers, corporate control, corporate restructuring, congress, Business Roundtable, tender offers, capital marketAccepted Paper Series
Date posted: March 10, 2003
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