The Market for Takeover Defenses
63 Pages Posted: 5 Sep 2006
This paper develops a market-based approach to takeover defenses. In this framework, a firm's decision to go public without defenses is considered a decision to produce an unshielded target. The paper shows that the voluminous classical literature on takeover defenses, which argues either that takeover defenses are good for all firms or that they are bad for all firms, actually ignores both supply and demand considerations. Recent empirical findings that revealed that IPO-stage firms diverge in antitakeover practices led to the rapid development of a new branch in the literature. This branch emphasizes that firms diverge in defense-adopting costs due to the heterogeneous characteristics of the "producers," meaning that the literature now acknowledges supply-side considerations. The literature still overlooks, however, demand-side considerations, which are highlighted in this paper. The paper argues that bidder propensity to pay is related to the number of firms that go public without defenses. As a result of takeover diversion from shielded targets to unshielded targets, the fewer the number of firms that produce unshielded targets, the higher the price that the market will pay for unshielded firms. Finally, the existing supply-side explanations merge with the novel demand-side argument to form a full picture of the market for takeover defenses, which serves to explain the findings of recent empirical studies that have been so puzzling to corporate scholarship up until now.
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