The financial performance of companies acquiring very large takeover targets

Abstract

Empirical evaluations of the theory of disciplinary takeover during the 1970s concluded that whilst very unprofitable companies experienced a somewhat higher probability of takeover than average, it was company size which acted as the most powerful discriminator between taken-over firms and others. In particular, very large firms were relatively immune from takeover and would therefore be relatively unrestrained by the market for corporate control. However, during the 1980s, financial innovations (e.g. junk bonds in the US and mezzanine debt in the UK) enabled companies to overcome traditional obstacles in the financial markets and acquire very large targets. This paper focuses upon some of the largest taken-over companies during the 1977–90 period and analyses the performance of acquirers of these companies using Cumulative Abnormal Returns (CARs) and accounting profit. Since these very large targets had been sheltered from the threat of takeover, they may well have developed specially large x inefficiency. The paper therefore asks whether such takeovers yield specially large performance improvements.