Question

What are the advantages and disadvantages of the friendly versus hostile approaches to a corporate takeover? Be specific.

Answer 1

Friendly transactions realized abnormal returns to target shareholders of about 25% during the 2000s

•Hostile transactions often result in even larger average abnormal returns to target shareholders

•Acquirers’ shareholders earn average abnormal returns of 1% to 1.5%; however, they may be negative for deals involving large public firms and those using stock to pay for the deal

l•Recent studies suggest

–Takeover defenses have small negative impact on abnormal target shareholder returns

–Defenses put in place prior to an IPO may benefit target shareholders

–Bondholders in firms with ineffective defenses (i.e., vulnerable to takeover) may lose value.

Hostile takeover attempts and proxy contests affect governance through the market for corporate control

•Although relatively rare, hostile takeover attempts tend to benefit target shareholders substantially more than the acquirer’s shareholders by putting the target into “play.” Consequently, acquirers generally consider friendly takeovers preferable.

Anti-takeover measures share two things in common. They are designed to

–Raise the overall cost of the takeover to the acquirer’s shareholders and–Increase the time required for the acquirer to complete the transaction to give the target additional time to develop an anti-takeover strategy.

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