The Development of the Takeover Auction Process: The Evolution of Property Rights in the Modern Wild West

Abstract

Using a unique, hand-collected sample of U.S. acquisitions, we study the interaction between the legal system and the takeover auction process during the 1981 to 2015 time period. We associate the strengthening of the property rights of target boards after the 1989 Time Inc. decision with fundamental changes in the takeover auction process. Following the 1989 decision, takeover auctions have moved from public and often hostile battles to a more behind the scenes, underground process where target boards control both the number of bidders and the flow of information. Target boards are more likely to initiate the auction themselves and the time between private deal initiation and public deal announcement has significantly lengthened. Accounting for the increasing length of the deal initiation process, target premiums have significantly risen since 1989. Our property rights interpretation contrasts with the entrenchment story that argues that the decline in hostile takeovers has protected poorly performing management at the expense of target shareholders. Our results are consistent with the fundamental proposition of Coase (1959, 1960) that with well-defined property rights, resources flow to their highest valued use.

Keywords: Takeover auction, property rights, underground auction, target premiums

JEL Classification: G34, G38