Corporate Takeover Targets

Acquisition Probability

Hicham Meghouar

• Publisher: Wiley-ISTE
• Year: 2016
• Print ISBN: 9781848219175
• eBook ISBN: 9781119292265
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The term "takeover", of which the first form is mergers and acquisitions (M&A), refers to the transfer of control of a business from one group of shareholders to another. Considering the importance of this issue and the real drives behind takeovers, it has become imperative to identifying companies that are vulnerable to takeover by two types: tender offer and exchange offer.

This book thus presents the legal aspects, the theoretical justifications and the empirical contributions of takeovers, and analyzes the economic and financial characteristics of targets in order to assess the probability of being acquired. An empirical approach based on two quantitative studies is then applied to the European market, which is still virgin territory in terms of academic research. Finally, acquisition probability models have been developed and they have a 72% forecast accuracy average rate of targets.

Corporate Takeover Targets is aimed at students and researchers in economic and management, as well as M&A consultants.

PART 1
Corporate Takeovers: Theoretical Justifications and Empirical Contributions

Introduction to Part 1

Takeover bids are considered a major instrument in organizing the economic fabric created by companies through a more efficient reallocation of assets and capital, which responds to an industrial logic of redeploying various activities within the economy [MUL 96]. Expansion through takeover bids is one of the means used by companies to carry out specialization, vertical integration or diversification strategies. Therefore, these transactions form the core of industrial and technological policies. They call to attention all economic actors – national, political, and economic authorities, the European Commission – which seek to ensure the observance of competition rules and the proper functioning of financial markets. To prevent the abuse of a dominant position (or monopoly power), companies considering a merger or acquisition are required to apply for authorization from market regulators, and thus monopolies have been, since 1890 and following the Sherman Antitrust Act, generally prevented [COM 02]. Regarding the main motivating factors behind takeover, these transactions can be used for speculative or strategic purposes. They are particularly useful when the competitive arena changes rapidly, as in periods of rapid innovation and globalization. Several studies have been carried out on their performance. What is first observed regarding these studies is the vast diversity of the results.

The aim of the first part of this book is to present the theoretical environment in which our research is carried out, through a survey of theoretical and empirical contributions of takeover bids. The first chapter presents the economic and legal framework of takeovers. It highlights the importance of this phenomenon to the company and to economic growth in general and describes its legal aspects, including the role played by local and national authorities in the planning and implementation of these transactions. The second chapter reviews economic justifications of takeovers and theoretical references on their potential effectiveness, as well as the results of empirical research on the motivation and performance of this type of transaction.

1
Economic and Legal Framework of Takeover Bids in Europe

Takeover bids are operations that change the ownership of a business, usually resulting in a change in the management and strategy of the latter. The acquisition of giant companies destabilizes the functioning of targets and frequently affects its employees. It undermines the authorities and poses the problem of the role and rights of shareholders. Statutory and regulatory measures are put into place by financial market authorities to enable the smooth running of these transactions and to ensure the protection of rights of shareholders involved in this process.

The practice of takeover bids has been developed in Europe since the mid-1980s and had increased by the end of this period. Thus, after relative stability in the mid-1990s, a new rebound was observed at the end of this decade. The Internet bubble burst in 2000 resulted in a relative stagnation of the phenomenon before being revived over the course of 2003. However, mergers between giants can also have consequences, in terms of consumer interest, because of monopoly. Are M&A controlled in Europe? What about national regulations and their harmonization?

Before giving answers to these questions, we present in the first section a general approach to the term “takeover”. In the second section, we will present the economic impact of takeover bids in the global economy, while stating the importance of the phenomenon in Europe and the United States. The third section shall analyze the degree of control of such operations by competition authorities in Europe.

1.1. Corporate takeover: general description

The reflections given by Berle and Means in the 1930s [BER 32] focused on the separation of ownership and control in business: shareholders entrust the management of the company to managers who do not necessarily have common objectives with those of their constituents. Managers can, for example, take advantage of their position to pay people who are close to them beyond their expertise, or to engage in investments enabling them to increase their social position and not to maximize shareholder wealth. For companies that are controlled by such managers and in which ownership is dispersed, the “the market for corporate control” is the means of disciplining managers by floating the threat of a market sanction over their authority. The market of corporate control provides a protective function to shareholders with regards to the authority of managing bodies.

Before defining the term takeover, we propose to revisit the concept of takeover within the company. Insofar as the control of a company involves the provision and management of its assets by the management team in place, a management that does not improve the wealth of the owners creates an agency problem between shareholders and prepares the ground for a possible corporate takeover.

1.1.1. The control

The historical evolution of the financial structure of companies brings about shareholding, which has progressively become the centre of interest within companies. The separation of ownership and control reflects a situation where the divergence of interests between owners and managers is problematic.

1.1.1.1. General approach to the term

The development of shareholding has been one of the major advancements of companies since the late nineteenth century. The management of affairs and ownership of share capital have become two independent fun...

Table of contents

• Cover
• Table of Contents
• Dedication
• Title
• Copyright
• Introduction
• Part 1: Corporate Takeovers: Theoretical Justifications and Empirical Contributions
• Part 2: Exploration of Predictive Variables for Takeover Bids and Forecast of European Targets
• Conclusion
• Bibliography
• Index
• End User License Agreement