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Analytical Perspective


1.1  Definition

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control is the right to determine the management of corporate resources ie the
right to hire, fire and set the top-level managers’ compensation Fama and
Jensen (1983a; 1983c). When a bid firm acquires a target firm, the control
rights to the target firm are transferred to the board of directors of the
acquiring firm. While corporate boards always maintain top-level control
rights, they typically delegate the right to manage corporate resources to
internal managers. In this way, the top management of the takeover firm derives
the right to manage the target company’s resources.


Managerial competition

at the market for corporate control as an arena where competing management
teams are a subtle but substantial transition from a traditional perspective,
where financiers and shareholders of shareholders are parties (alone or in
combination with others) buy company control and hire and fire management to
achieve better use of resources.In this perspective, competition among
management teams for managing resources reduces the difference between
maximizing shareholder’s wealth by managers and providing mechanisms through
economies of scale or other synergies available from combining or reorganizing
the control and management of corporate resources. Stockholders have no loyalty
to existing managers; they only choose the highest dollar value offering rather
than those presented to them in markets that work well for corporate controls,
including selling at market prices to arbitrageurs and anonymous takeover
experts. We see the market for corporate control, which is often referred to as
the takeover market, as a market where alternative management teams compete for
the right of managing corporate resources. Arbitrageur specialists and
acquisitions facilitate this transaction by acting as an intermediary to
appreciate the offer by competing management teams, including responsible
managers. The managerial competition model is not looking at the competing
management team as the main activist entity, with stockholders (including
institutions) playing a relatively passive role, but fundamentally important.
In mergers or tenders offer a bid firm offering to buy a common stock of the
target at a price that exceeds the previous target market value.


Overview Of The Issues
And Evidence


Abnormal percentage stock price
changes associated with successful corporate takeoversa

Takeover technique






Tender offers






Proxy contests



a   Abnormal price changes are price
changes adjusted to eliminate the effects of marketwide price changes.


b   Not applicable.


Table 2

Abnormal percentage stock price
changes associated with unsuccessful corporate takeover bidsa

Takeover technique






Tender offers






Proxy contests



a   Abnormal price changes are price
changes adjusted to eliminate the effects of marketwide price changes.

b   Not applicable.

1 shows that target firms in successful takeovers experience statistically
significant abnormal stock price changes of 20% in mergers and 30% in tender

Table 2 shows that
both bidders and targets suffer small negative abnormal stock price changes in
unsuccessful merger and tender offer takeovers, although only the -5% return
for unsuccessful bidders in mergers is significantly different from zero.
Stockholders in companies that experience proxy contests earn statistically
significant average abnormal returns of about 8%.

difference between a large stock price increase for a successful target firms
and an insignificant stock price change for unsuccessful targets suggests that
merger and tender offer benefits are only realized when the control of the
target company’s assets is transferred to the bid firm. In unsuccessful tenders
offering target stock prices remained far above the pre-offer level, unless the
next offer did not take place within two years following the initial offer.

            The evidence reviewed in section 3,
‘Antitrust and the Source of Merger Gains’, shows that merger profit does not
come from the creation of product market power. This is an important finding as
the evidence also shows antitrust resistance to the takeover cost to
incorporate firms by restricting corporate control transfers.

evidence set out in section 4 shows that some actions that reduce the
probability of a takeover, such as changes in corporate charter, do not
diminish the shareholders’ wealth. Section 5 discusses unresolved issues and
suggests indicators for future research.






The wealth effects of
takeover activities


returns are measured by the difference between actual and expected stock
returns. The expected return of the stock is conditional on the returns
achieved on the market index to take into account the influence of market
events on the return of individual securities. In some cases, abnormal returns
are derived from a study whose main purpose is to examine other issues, for
example, the implications of merging antitrust.


Target Firm
Stockholder Returns

returns to targets. Evidence shows that the target of successful tender offers
and mergers earn significantly positive abnormal returns on announcement of the
offers and through completion of the offers. The target of unsuccessful tender
offer a positive abnormal return on bid announcements and through failure
awareness. However, unsuccessful targets offer an offer that does not receive
additional offers in the next two years will lose all the profits of previous
announcements, and targets that accept new offers will get a higher return.
Finally, unsuccessful merging targets seem to have lost all positive returns
obtained during the announcement of the offer with a failure of known offer


Stockholder Returns

bidders. bidders in a successful tender offers a significant percentage
increase in equity value, although this increase is significantly lower than
the 29.1% return to the successful bid offer target.

evidence of returning borrowers in mixed consolidation and therefore more
difficult to interpret than that for bidding tender offer. Dodd (1980) found an
abnormal return of -1.09% for 60 successful bidders on the day before and the
first public announcement of the merger-indicating that the merger deal was, on
average, the net negative investment value for the bidder.

within the same two days, Asquith (1983) and Eckbo (1983) reported a bit
positive, but statistically insignificant, abnormal returns – suggesting that
the merger deal was a zero present value investment. Contrary to the findings
of the mix for immediate announcement, all five estimates of a one-month
announcement in panel B.2 from table 3 are positive, but only approximately
3.48% by Asquith, Bruner and Mullins (1983) are different from zero. However,
within the same two days, Asquith (1983) and Eckbo (1983) reported a bit
positive, but statistically insignificant, abnormal returns – suggesting that
the merger deal was a zero present value investment.

bidders. Abnormal returns are positive to the bid firm in response to the
announcement that the unsuccessful acquisition attempt is inconsistent with the
hypothesis that the acquisition is a positive current net value investment. If
the merger is a positive return project, the return of the announcement of the
goal termination should be negative. Problems in measuring bidder returns.
Given that stock price changes reflect changes in anticipation, the merger
announcement has no effect if its terms are fully expected in the market.
Furthermore, the target is earned at most, while bidders can engage in
prolonged procurement programs. Malatesta and Schipper and Thompson show that
the present value of the expected benefits of the bidding acquisition program
is incorporate in the share price when the acquisition program is announced or
becomes clear to the market. Therefore, profits for bidding firms are measured
by the change in value associated with the initial information on the
acquisition program and the additional effects of each acquisition.


The Total Gains From

evidence of rewards for bidding firms is mixed, but the weight of evidence
shows zero returns acquired by successful bidding firms in mergers and
significant but small positive abnormal returns realized by bidders in a
successful tender offer. However, as bidding firms tend to be larger than
target firms, the amount of return to bid and target returns does not measure
profits to mergers firms. The dollar value of a small percentage loss for
bidders can exceed the dollar value of a large percentage profit to the target.
However, the average change in percentage in the combined value of the combined
target and the bidding company is 10.5% significant. This evidence suggests
that changes in corporate control increase the combined market value of the
bidding assets and target firms.

Antirust And The
Sources Of Merger Gains


evidence summarized above shows that this argument is false; The profit of the
bidder (if any) does not appear to be a simple transfer of wealth from the
target shareholder. Acquisition are also opposed by target firms, competitors,
and antitrust authorities, among others, who argue that mergers are undesirable
as they reduce competition and create a monopoly of power. The opposition has
postponed the merging of the merger, resulting in the cancellation of the
merger, and led to a court takeover ordered by a previous takeover. In
addition, evidence showing positive net benefits to merging firms, together
with zero or positive abnormal returns to the bidders, is inconsistent with the
hypothesis that the acquisition is driven by maximizing value behavior by
bidders’ managers.


The Sources Of
Takeover Gains

decline in production potential or distribution costs, often called synergies,
can occur through the realization of economies of scale, vertical integration,
more efficient use of technology or organizational technology, increased use of
bidders management, and reduction of agency costs by bringing
organization-specific assets under ownership normal.Financial motivation for
acquisitions includes the use of underutilized tax shields, avoiding bankruptcy
costs, leverage increases, and other types of tax advantages. Takeovers can
increase market forces in the product market. Research by Stillman (1983) and
Eckbo (1983), higher prices allow firms to compete to increase their product
prices and/or outputs, and therefore the competing firm’s equity value should
also increase on the announcement of the offer. The hypothesis of market power
demonstrates that the merger of raising product prices thus benefits the
merging firm and other competing firms in the industry.





The Costs Of Antirust

abnormal returns associated with antitrust complaints, and cancellation of
mergers caused by antitrust actions indicate that antitrust resistance to
acquisitions imposes substantial costs on merger of shareholders. The findings
are particularly interesting as evidence shows that the merger profit does not
arise from the creation of market forces but from the acquisition of some form
of efficiency.


The Effects Of
Takeover Regulations

raising transaction costs and imposing restrictions on takeovers, the rules may
cut down on actual acquisition distributions. This unprofitable takeover
deduction will reduce the returns to non-targeted firm shareholders and will
not affect the returns to those who are targeted, but will increase the average
abnormal returns for completed takeovers targets. If market participants are
not able to identify the target before the offer, appreciable price changes in
stock prices will not be observed for future targets at the time of regulatory

















Conflicts Of Interest


Corporate Control :
The Issues

serves as an external control mechanism that prevents major management
departures from maximizing shareholder wealth. While the investment maximizes
value, price reductions can result in exogenous reductions in profits invested
by the market. Although investments are proven as negative present value
investments, it is difficult, because of uncertainty, distinguishes between
management inefficiencies, management opportunism, or simply bad luck. However,
potential target managers can experience welfare losses in takeovers, for
example, through their displacement as a manager and loss of specialized human

            Acting freely, each shareholder
maximizes his wealth by tendering, even if the target shareholders are better
off if there is no tender so they receive a greater fraction of the
profitability of the takeover. This problem is reduced by requiring bidders to
obtain simultaneous approvals of more targeted shareholders, and enable
management to act as agents for target shareholders. Overall, evidence indicates
that negative returns are associated with management action on acquisition (1)
if the action eliminates the takeover offer or causes a takeover failure, or
(2) if such action does not require the approval of a formal shareholder either
through a voting or tender decision.


Changes In State Of

variation in state law means that changing the state of incorporation affects
the contractual arrangement among shareholders effected through the corporate
charter, and these changes can affect the probability that a firm will become a
takeover target.


Antitakover Amendments

increasing the strength of the terms of the takeover, such amendments can
reduce the probability of becoming a target of acquisitions and thereby
reducing shareholder wealth.



Managerial Opposition
To Takeovers

target shareholders benefit from takeovers, explicit management actions to
avoid takeover of the offered prices are seen as an example of self-pursuit at
the expense of shareholders. If the management opposition only raises costs,
the offer will be lower than they would be otherwise and the low profit
takeover will not happen. The truncation hypothesis  is consistent with the evidence that profits
to bidders are also greater in tender bidding. If the target is canceling the
merger by anticipating a more profitable future takeover bid that would benefit
the shareholders, the abnormal return to the target on the cancellation
announcement would be positive and not negative.


Targeted Large Block
Stock Repurchased

combined evidence presented by Dann and DeAngelo, and Bradley and Wakeman point
out that repurchase of large premium-targeted blocks reduces the wealth of
non-participating shareholders. These evidence provide strong enough
indications that target repurchases at premiums greater than market prices that
reduce the wealth of non-participating shareholders.


Standstill Agreements

standstill agreement is a voluntary contract in which the firm agrees to
restrict the ownership of another firm, and, therefore, does not undertake a
takeover attempt. Bradley and Wakeman (1983) evidence of regressions now shows
that ‘news of the merger termination and the announcement of a standstill
agreement have the same informational content’. This evidence also supports the
hypothesis that the management opposition that forces the takeover offer
reduces the wealth of non-participating shareholders.


Going Private

DeAngelo and Rice (1982) examined returns to shareholders in a 72 ‘going
private’ proposal for firms listed on the New York Stock Exchange or American
Stock Exchange during 1973-1980. In genuine personal proposals, public share
ownership is replaced by full equity ownership by the existing management team
and the stock is dismissed. They argued that gains from private transfers were
due to the ‘savings of registration and other public ownership expenses, and
improved incentives for corporate decision makers under private ownership’..
the fact that shareholder litigation takes place in more than 80% of private
proposals that do not involve third parties indicating that these premiums due
to restrictive powers are usually given minority shareholders to conduct
personal transactions. In genuine private proposals, public ownership of stocks
is replaced by full equity ownership by the existing management group and the
stock is delisted


Direct Evidence On
Stockholder Control

Proxy Contest. In
takeover, bidders offer premiums to target shareholders so that the target
stock price can increase even though there is no higher value uses for the
existing target asset of the premium representing in this case the transfer of
wealth from the shareholders of the bidding company to the target of the
shareholders of the enterprise. Results at Dodd and Warner show that the
acquisition of partial separation representation on board is associated with
positive abnormal returns, and complete failure to obtain representative
results in negative abnormal returns. The value control. Corporate control as
the right to determine the management of corporate resources, and these rights
lie on the board of directors of the corporation.













Unsettled Issues And
Directions For Future Research


Further progress
toward understanding the market for corporate control will be substantially
aided by efforts that examine other organizational, technological and legal
aspects of the environment in addition to the effects of takeovers on stock


Competition Among
Management Teams

takeover market is an arena where alternative management teams compete for the
right of managing corporate resources. In a small management team the takeover
can consist of a single proprietor or a partnership of managers. Competitive
management teams are also often organized in corporate forms, especially in
large acquisitions.

contractual setting. Competition analysis among market management teams for
corporate control must begin with the specifics of analytical aspects of
institutional and contractual environment. In particular, the nature of the
rights of each party in the contract set to determine an open corporation is
essential to functioning the market for corporate control.In this view, the
agency’s control of residual risk separation problems from management functions
requires separation of management functions from control functions. Low cost
transfer capabilities allow external competitors to compete to bypass current
management and board of directors to gain the right to manage corporate resources.
Competition from alternative management teams on the market for corporate
controls serves as a source of external control over the system of internal
controls of corporations. When a breakdown of the system of internal control
imposes substantial cost to shareholders from inefficient, lazy or dishonest
managers, the takeover offer on the market for corporate control provides
vehicles to replace the entire system of internal control.


Directions For Future

and benefits inspections to successful management teams in success or failure
in the takeover market will help in understanding the strengths that determine
the time and why the acquisition is initiated, and why the target manager
opposes or approves the proposal. . These opposing strategies are consistent
with managerial competition, the bidder seeks to reduce the ability of
competing management teams to compete, and the target wants more time to
respond to offers or find other offers that offer better opportunities for
themselves and their shareholders. The information may be issued to white
knights, possibly through confidential information centers, and both existing
management teams and target shareholders will benefit. Understanding the
acquisition strategy also requires more detailed knowledge of the effects of
voting rules see Easterbrook and Fischel (1983), effective control
determinants, institutional ownership effects, and the effects of specialized
acquisition agents and arbitrageurs see Wyser-Pratte (1982). No one as yet
has studied the prices paid by white knights in mergers; folklore holds that
embattled target managers search out such friendly merger partners to rescue
them from an unfriendly takeover.



controversial issues regarding the market for corporate control have not been
resolved and many new issues have yet to be learned. In summary, the evidence
seems to indicate that corporate takeovers generate positive profits, that the
target firm shareholders benefit and that bidding firm shareholders do not
lose. While market research for corporate control has grown rapidly, in our
opinion, the growth industry.




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