The Efficiency of Takeovers
The Corporate Board, pp. 16-22, September/October 1985
14 Pages Posted: 30 Sep 2003
The market for corporate control that has arisen in the last two decades is generating large benefits for shareholders and for the economy as a whole. The corporate control market generates these gains by loosening the control over vast amounts of resources and making it possible for those resources to move more quickly to their highest-valued use. This occurs through takeovers (both hostile and friendly), divestitures, spin-offs, split-ups, leveraged buyouts, and going-private transactions.
We are seeing a normal healthy market in operation, both on the takeover side and on the divestiture side. The total benefits have been huge as reflected in gains of $40 billion to stockholders of acquiring firms in 260 tender offers alone in the last four and a half years (as estimated by the office of the chief economist of the SEC).
The market for corporate control is best viewed as a major component of the managerial labor market. It is the arena in which alternative management teams compete for the rights to manage corporate resources. Understanding this is crucial to understanding much of the rhetoric that takes place about the effects of hostile takeovers.
Managers formerly protected from competition for their jobs by antitrust constraints that prevented takeover of the nation's largest corporations are now facing a much more demanding environment and a more uncertain future. It is not surprising that many of them would like relief from this competition.
Keywords: corporate control market, takeovers, leveraged buyouts, divestiture, tender offers, hostile takeovers, antitrust constraints
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