Bargaining in the Shadow of Takeover Defenses

Guhan Subramanian

Harvard Business School

December 2003

Yale Law Journal, Vol. 113, Issue 3, pp. 621-686, December 2003

Abstract:

Among the arguments that have been put forward to support the view that takeover defenses increase shareholder returns when a company becomes a takeover target, the «bargaining power hypothesis» is the most commonly cited argument today. Under this theory, takeover defenses allow the target to extract more in a negotiated acquisition because the bidder’s no-deal alternative, to make a hostile bid, is worsened. Despite its centrality to the current debate on takeover defenses, the bargaining power hypothesis has never been subjected to a careful theoretical analysis or to a comprehensive empirical test. In this Article I present a model of bargaining in the «shadow» of takeover defenses that introduces alternatives away from the table, hostile bid costs, asymmetric information, and agency costs into the standard bargaining model. I confirm the features of this model using interviews with the heads of mergers and acquisitions at ten major New York City investment banks, which collectively account for 96% of U.S. M&A deal volume. I also present econometric evidence that is consistent with this model. The theoretical model, practitioner interviews, and econometric evidence presented here indicate that the bargaining power hypothesis is unlikely to be valid in many if not most negotiated acquisitions. This conclusion has implications for whether defenses increase or decrease shareholder wealth, and whether the recent pro-takeover movements in the Delaware courts will lead to negative consequences for target shareholders in negotiated acquisitions.

Bargaining in the Shadow of Takeover Defenses

Be the first to comment

Leave a Reply

Tu dirección de correo no será publicada.


*


Google Analytics