Do anti-takeover devices affect the takeover likelihood or the takeover premium?

Abstract

In this paper, we use Heckman selection models to analyse the relation between the likelihood of the firm becoming a takeover target, the takeover premium, and the use of anti-takeover devices. Ordinary least squares regressions suggest that anti-takeover devices, especially dual class shares, are associated with a higher takeover premium. However, we also document that anti-takeover devices reduce the likelihood that the firm will be taken over. When we control for the fact that takeover targets are selected, we do not find a significant relation between the takeover premium and dual class shares. Hence, our results suggest that the takeover premium is indeed influenced by private information about the likelihood of takeover.

Keywords:

• takeover likelihood
• takeover premium
• Heckman selection
• anti-takeover devices
• dual class shares

JEL Classification:

• G34
• G32

Acknowledgements

We appreciate the generosity of The Jan Wallander and Tom Hedelius Foundation, and VINNOVA (grant 2010-02449). We would like to thank two anonymous referees, Björn Hansson, David Smith and seminar participants at FIRS 2009, SNEE 2010, the University of Innsbruck and the Ratio Institute for valuable comments.

Notes

For a discussion of the event study methodology in financial economics, see MacKinlay (1997).

See, for example, Morck, Shleifer, and  Vishny (1989), Dickerson, Gibson, and Tsakalatos (2002) and Betton, Eckbo, and Thorburn (2008) and references therein.

See, for example, Bradley, Desai, and Kim (1988), Franks and Harris (1989), Stulz, Walkling, and Song (1990) and Betton, Eckbo, and Thorburn (2008) and references therein.

See, for example, Song and Walkling (1993).

We run robustness tests based on a US sample.

At negotiated block trades (partial takeovers), we do not observe the takeover premium paid by the bidder and the involved parties do not have to disclose the price at which the block was traded.

The results for anti-takeover devices other than dual class shares are statistically weak though.

These publications are referred to as Sundqvist et al. below.

Part of this data was provided by Kristian Rydqvist.

We do not include non-traded high-voting stock and voting restrictions when constructing our indicator variable for anti-takeover devices. Non-traded high-voting stock is conditional on dual class shares and highly correlated with our Votes-Equity variable (correlation ), and we want to separate the potential different effects of the use of dual class shares and other anti-takeover provisions. However, we report several robustness tests on the effect of non-listed high-voting stock below. The effect of voting restrictions as an anti-takeover device is ambiguous since it depends on the ownership structure of the firm. Including it when constructing an alternative anti-takeover variable generates similar but statistically weaker results compared to the results reported below. In general, we find a lower frequency of anti-takeover devices in our sample than Cronqvist and Nilsson (2003). We focus on the largest firms while they look at all listed firms. Anti-takeover provisions are more common among small firms.

Note that mean differences are tested on the natural logarithm of Votes-Equity, Firm Size, and Tobin's q.

The Affärsvärlden database contains all newspaper articles from the Swedish business press. We search for the first day the press mentions the tender offer and define the day before as the day of the announcement.

It is not possible to calculate the takeover premium based on the offered price since some of the non-cash offers include convertibles and warrants for which we do not have complete information.

There are no failed bids during the estimation periods.

According to Swedish law, the bidder can differentiate the offer price between A- and B-shares. Nevertheless, the bidder cannot differentiate the offer price within the groups of A and B shareholders.

Without these five firms, the abnormal returns on day −9 are insignificant.

In the process of initial data collection, we searched for the relevant news and rumours in the financial press prior to the official takeover announcements. We found no news or rumours combining the target firm and the bidding firm with an expected takeover.

Leverage may, therefore, influence the takeover premium as well. However, in our data there is no such significant relationship.

The model in Table 7 uses both variables.

Bebchuk (1999) argues that ‘the decision to adopt dual-class equity in conjunction with a concentrated ownership structure can only be explained by the existence of private benefits of control’.

Another variable that has been found to be significantly related to the takeover premium is the relative size of the target and bidder. It is not possible to include this variable in the system of equations since it includes information about the bidding firms. We could include it in the OLS regressions. However, collecting the size of private and foreign bidders is difficult, especially for the takeovers in the 1980s.

In the majority of the tender offers, the blockholders, who typically hold A-shares, do not get preferential treatment. This result is consistent with the small control block premium in Sweden documented by Dyck and Zingales (2004). Many blockholders of A-shares also hold large blocks of B-shares and might, therefore, be compensated by a relatively high price on the B-shares. In fact, our results suggest that if the blockholder does not also hold a large block of B-shares, i.e. Votes-Equity is high, they might not reach an agreement with the bidder and hence the takeover likelihood decreases.

In some previous studies, the cross-sectional results also change depending on how the takeover premium is estimated; see for example, Bargeron et al. (2008).

CGQ is a corporate governance rating system provided by Institutional Shareholder Services on over 8000 companies worldwide. It evaluates the strengths, deficiencies, and risks of a company's corporate governance practices and board of directors. CGQ uses underlying data points for up to 67 corporate governance variables, categorized into four areas of focus: (1) board of directors, (2) audit, (3) anti-takeover provisions, and (4) executive and director compensation. In addition to the overall index, CGQ provides sub-scores for each focus area. A firm's sub-score represents quintile (5 = top quintile) rankings in terms of shareholder-friendly policies within each sub-category compared to the firm's market index and its industry group. We report results for the index ranking. The results for the industry ranking are similar. We take the inverse of the quintile ranking in order to make the US results more easily comparable to the Swedish results.

Compared to the Swedish results, the CGQ Anti-takeover Score is not significant in the selection equation, whereas duration dependence is negatively significant.