Characteristics of Targets of Hostile and Friendly Takeover: Comment
Michael C. Jensen
Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
PROCEEDINGS OF CONFERENCE ON CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES, Alan Auerbach, ed., University of Chicago Press, 1988
The paper by Morck, Shleifer, and Vishny contributes significantly to our knowledge of the takeover process. The authors conclude that the motive for friendly acquisitions is more likely to be synergistic, whereas in hostile ones it is more likely to be disciplinary. Hostile targets were older, slow growing firms that were investing a smaller fraction of earnings than the average firm in the sample and whose capital was valued by the market at less than half its replacement cost-all of which is consistent with the theory of the agency costs of free cash, which predicts that managers will generally disinvest too slowly. I agree with the authors' conclusions, but there are a number of things the authors did not examine that would have considerably improved our understanding of the issues.
The authors did not consider takeover attempts that were unsuccessful, that is, attempts in which the target firm remained independent. Their conclusions apply only to friendly or hostile acquisition targets that were eventually taken over. The authors therefore missed an opportunity to tell us something about firms that were more likely to fail at a friendly deal or more likely to successfully fight off a hostile offer.
Number of Pages in PDF File: 5
Keywords: takeovers, hostile acquisitions, takeover process, hostile vs. friendly targets, value, agency costs
Date posted: July 29, 2003