TAKEOVER DEFENSES IN HOSTILE TAKEOVERS: AN ANALYSIS OF PREMIUM, PROBABILITY OF SUCCESS AND CORPORATE GOVERNANCE UNDER THE U.S. AND U.K. LEGAL REGIMES

Abstract

This paper investigates the impacts of takeover defenses commonly used in the U.S. and U.K. on the premium paid and the probability of success in hostile takeovers. Using data on hostile takeovers over a span of 20 years (1/1/1992 to 12/31/2011) in the U.S. and U.K., we find that in the U.S. sample, the takeover defenses generally have no significant effect on the premium or the probability of success. However, golden parachute reduces the premium in the sample of successful U.S. hostile takeovers. For the U.K., we find that profit forecast, profit report, share buyback and attack bidder/bid increase the premium. In addition, the probability of successful hostile takeover is improved when the targets try to create competitive pressure. When comparing the U.S. and U.K. sample, we find that the U.S. hostile takeovers have a higher average premium but a lower average probability of success. The results suggest that defenses that allow management to extract private benefits without corresponding benefits to the acquirers, e.g. golden parachute, are unable to increase premium during hostile takeovers. Conversely, takeover defenses that release more positive information about the targets to the market, e.g. profit forecast, effectively raise the premium and consequently benefit targets’ shareholders. Most importantly, our results show that defenses with a frustrating effect implicitly increase the premium but reduce the probability of success in hostile takeovers in the U.S. Hence legal doctrine plays an important part in shaping takeover landscapes.