Financial Buyers in Takeovers: Focus on Cost Efficiency

Abstract

This paper examines whether financial buyers are more likely to initiate takeovers ofinefficient firms. We show that they indeed are and thus conclude that takeovers byfinancial buyers play a potentially beneficial role in the allocation of corporate assets in the U.S. economy. Our analysis of determinants of takeovers initiated by financial buyers uses an application of the methodology developed in Trimbath, Frydman and Frydman (2001). In order to illustrate efficiency enhancements introduced by financial buyers, we select Forstmann and Little s acquisition of General Instrument for a brief case study. We show that their aggressive programs of cost management substantially improved theefficiency of General Instrument. Moreover, it allowed General Instrument to expandresearch and development to become the global leader in high definition television.

Keywords: Investment Banking, Corporate Finance and Governance, Mergers, Acquisitions, Econometric Methods