Corporate takeover defenses : an analysis of the effects on shareholder wealth

Mergers among large corporations have always been a high profile segment of the American corporate landscape. From the first horizontal mergers of the 1880s to the heated takeover battles a century later, merger activity has received much attention from the American public. Some argue that mergers will create monopolies and thus erode the American ideals of capitalism, competition and the free market system. In the 1890s, Congress reacted by passing laws such as the Sherman Antitrust Act to prevent such activity. In the 198Os, however, government has chosen not to get involved except in those cases which have been determined by the Federal Trade Commission and the courts to significantly reduce competition. Those businesses which desire to remain independent have been left to their own devices; thus the creation of takeover defenses. Takeover defenses are strategies used by target firms for the purpose of impeding the attempt of an unfriendly investor to gain control of the firm. A strong debate exists over the reason these strategies are adopted. Many individuals and firms oppose these defenses on the grounds that they tend to entrench bad management and reduce the probability of the shareholders receiving a premium bid for their shares. Thus shareholder wealth is diminished with the adoption of such strategies. Others (mostly managers of firms who adopt such anti-takeover measures) support these defenses on the grounds that they impose a higher price on any bids made for the firm, thus increasing the shareholders' gains made from a takeover or a takeover attempt. This paper investigates the strategies target concerns are using to avoid the effects of hostile takeovers. It examines the takeover defense strategies and the change in target shareholders' wealth caused by these defenses.