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White Knights and the Corporate Governance of Hostile Takeovers

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  • Riccardo Calcagno

    ()
    (VU University Amsterdam)

  • Sonia Falconieri

    ()
    (Brunel University)

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    Abstract

    We analyze the dynamics of takeover contests where hostile raiders compete against white knights involved by a lead blockholder of the target firm (the incumbent). We assume that the incumbent has the power to bargain with the potential bidders to set a minimum takeover price. We characterize the conditions under which a white knight wins the takeover contest despite the smaller value of its synergies as compared to those of the hostile bidder. The paper provides a new explanation for the reason why we observe so few hostile takeovers in reality; moreover, it sheds some light on the effectiveness of white knights as an anti-takeover device and the role played by leading minority blockholders in the market for corporate control.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-118/2.

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    Date of creation: 15 Dec 2008
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    Handle: RePEc:dgr:uvatin:20080118

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    Web page: http://www.tinbergen.nl

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    Keywords: Hostile takeovers; white knights; Nash bargaining;

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    1. Eckbo, B. Espen, 2009. "Bidding strategies and takeover premiums: A review," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 149-178, February.
    2. Cathy M. Niden, 1994. "An Empirical Examination of White Knight," Financial Management, Financial Management Association, vol. 23(3), Fall.
    3. Martynova, M. & Renneboog, L.D.R., 2006. "Mergers and Acquisitions in Europe," Discussion Paper 2006-003, Tilburg University, Tilburg Law and Economic Center.
    4. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 351.
    5. Jay C. Hartzell, 2004. "What's In It for Me? CEOs Whose Firms Are Acquired," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 37-61.
    6. Franks, Julian & Mayer, Colin, 1996. "Hostile takeovers and the correction of managerial failure," Journal of Financial Economics, Elsevier, vol. 40(1), pages 163-181, January.
    7. Stephanie Rosenkranz & Utz Weitzel, 2005. "Bargaining in Mergers: The Role of Outside Options and Termination Provisions," Working Papers 05-32, Utrecht School of Economics.
    8. Sven-Olof Fridolfsson & Johan Stennek, 2005. "Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1083-1104, 09.
    9. A Cosh & P Guest, 2001. "The Long-Run Performance of Hostile Takeovers: UK Evidence," ESRC Centre for Business Research - Working Papers wp215, ESRC Centre for Business Research.
    10. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 110.
    11. Mike Burkart & Denis Gromb & Fausto Panunzi, 2000. "Agency Conflicts in Public and Negotiated Transfers of Corporate Control," Journal of Finance, American Finance Association, vol. 55(2), pages 647-677, 04.
    12. Audra L. Boone & J. Harold Mulherin, 2007. "How Are Firms Sold?," Journal of Finance, American Finance Association, vol. 62(2), pages 847-875, 04.
    13. Ajeyo Banerjee & James E. Owers, 1992. "Wealth Reduction in White Knight Bids," Financial Management, Financial Management Association, vol. 21(3), Fall.
    14. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
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