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The Long-Run Performance of Hostile Takeovers: UK Evidence

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  • A Cosh
  • P Guest

Abstract

This paper examines the long-run pre- and post-takeover performance of hostile takeovers in the U.K. from 1985-96. Prior to takeover, targets in hostile takeovers experience a significant deterioration in profit returns, and significantly negative share returns. However, there is little evidence that profit levels are lower than those of non- merging firms. Bidders in hostile takeovers are not superior performers in terms of profit levels, although share returns are significantly high prior to takeover. However, in the post-takeover period hostile takeovers show significant improvements in profit returns, which are associated with significant asset disposals. In contrast, friendly takeovers do not improve profit returns and result in significantly negative long-run share returns. We find no evidence of an inverse relation between the performance improvement in hostile takeovers and the pre-takeover performance of the target. We interpret the results to indicate that although hostile takeovers improve performance, there is little evidence that they play an important role in reversing the nonvalue maximizing behaviour of target companies.

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Bibliographic Info

Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp215.

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Date of creation: Sep 2001
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Handle: RePEc:cbr:cbrwps:wp215

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Related research

Keywords: Hostile takeovers; friendly takeovers; disciplinary hypothesis; pre-takeover performance; post-takeover performance;

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References

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  1. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
  2. Andrei Shleifer & Lawrence H. Summers, 1987. "Breach of Trust in Hostile Takeovers," NBER Working Papers 2342, National Bureau of Economic Research, Inc.
  3. Eugene F. Fama & Kenneth R. French, . "Forecasting Profitability and Earnings," CRSP working papers 456, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1988. "Characteristics of Targets of Hostile and Friendly Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 101-136 National Bureau of Economic Research, Inc.
  5. G. William Schwert, 2000. "Hostility in Takeovers: In the Eyes of the Beholder?," Journal of Finance, American Finance Association, vol. 55(6), pages 2599-2640, December.
  6. Kothari, S. P. & Warner, Jerold B., 1997. "Measuring long-horizon security price performance," Journal of Financial Economics, Elsevier, vol. 43(3), pages 301-339, March.
  7. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
  8. Raghavendra Rau, P. & Vermaelen, Theo, 1998. "Glamour, value and the post-acquisition performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 49(2), pages 223-253, August.
  9. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1989. "Managerial performance, Tobin's Q, and the gains from successful tender offers," Journal of Financial Economics, Elsevier, vol. 24(1), pages 137-154, September.
  10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  11. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1989. "Do Managerial Objectives Drive Bad Acquisitions?," NBER Working Papers 3000, National Bureau of Economic Research, Inc.
  12. Linn, Scott C. & Switzer, Jeannette A., 2001. "Are cash acquisitions associated with better postcombination operating performance than stock acquisitions?," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1113-1138, June.
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Cited by:
  1. Lina M. Cort├ęs & Diego A. Agudelo & Samuel Mongrut, 2012. "Waves and determinants in the activity of Mergers and Acquisitions: The Case of Latin America," DOCUMENTOS DE TRABAJO CIEF 010658, UNIVERSIDAD EAFIT.
  2. Robert Chirinko & Julie Ann Elston, 2003. "Finance, Control, and Profitability: The Influence of German Banks," Emory Economics 0304, Department of Economics, Emory University (Atlanta).
  3. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
  4. Riccardo Calcagno & Sonia Falconieri, 2008. "White Knights and the Corporate Governance of Hostile Takeovers," Tinbergen Institute Discussion Papers 08-118/2, Tinbergen Institute.
  5. Andy Cosh & Alan Hughes, 2008. "Takeovers after "Takeovers"," ESRC Centre for Business Research - Working Papers wp363, ESRC Centre for Business Research.
  6. John Armour & Simon Deakin & Suzanne J. Konzelmann, 2003. "Shareholder Primacy and the Trajectory of UK Corporate Governance," ESRC Centre for Business Research - Working Papers wp266, ESRC Centre for Business Research.
  7. Riccardo Calcagno & Sonia Falconieri, 2008. "White Knights and the Corporate Governance of Hostile Takeovers," Tinbergen Institute Discussion Papers 08-118/2, Tinbergen Institute.
  8. Gunther Tichy, 2001. "What Do We Know about Success and Failure of Mergers?," Journal of Industry, Competition and Trade, Springer, vol. 1(4), pages 347-394, December.

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