Are Friendly Acquisitions Too Bad for Shareholders and Managers? Long‐Term Value Creation and Top Management Turnover in Hostile and Friendly Acquirers

Published date01 March 2006
DOIhttp://doi.org/10.1111/j.1467-8551.2006.00476.x
Date01 March 2006
Are Friendly Acquisitions Too Bad for
Shareholders and Managers? Long-Term
Value Creation and Top Management
Turnover in Hostile and Friendly Acquirers
Sudi Sudarsanam and Ashraf A. Mahate
*
Cranfield School of Management, Cranfield MK43 0AL and
*
University of Wollongong in Dubai, PO Box 20183, Dubai, UAE
Corresponding author email: p.s.sudarsanam@cranfield.ac.uk
The well-documented failure of the majority of acquisitions to create value is often
identified in popular discussion with hostile acquisitions, whereas friendly acquirers
seem to get a friendly press. The relative performance of friendly and hostile acquirers
therefore warrants a rigorous empirical investigation. Clear evidence of superior value
creation in hostile over friendly acquisitions allows us to judge the efficacy of the market
for corporate control. In this article we examine the long-term shareholder wealth
performance of four types of acquirers – friendly bidder, hostile bidder, white knight
and hostile bidder facing a white knight or another hostile bidder. For a sample of 519
acquisitions of UK target firms during 1983–1995, we estimated the three-year post-
acquisition gains to acquirer shareholders and found that hostile acquirers deliver
significantly higher shareholder value than friendly acquirers. We found that friendly
acquirers with high stock-market ratings destroyed more value than hostile acquirers
with a similar rating. Friendly acquirer top managers suffered greater job losses than
those of hostile acquirers, perhaps paying the price for their inferior value-creation
performance. Our study provides evidence of the superior value-creation performance of
hostile acquirers and makes the case against takeover regulatory rules that may impede
hostile takeovers.
Introduction
Extensive research has documented that target-
firm shareholders in mergers and acquisitions
experience positive and statistically significant
wealth gains at the time of the bid announce-
ment. For bidders, the results tend to be
inconclusive, with previous studies showing both
small positive and negative abnormal returns.
Many studies evidence long-term value losses
over two to five years (for a review of these
studies, see Sudarsanam, 2003, ch. 4). Mergers
and acquisitions are observed as value destroying
for acquiring firm shareholders because there are
no synergies, or these synergies are not realized or
the acquirers overpay for their acquisitions. The
scope for value creation overall and for a positive
share of these gains for the target and acquirer
shareholders depends on the acquirer type.
Morck, Shleifer and Vishny (1988b) argue that
friendly mergers, i.e. agreed between acquirer and
target managements, are essentially driven by
synergy considerations whereas hostile takeovers,
i.e. those resisted by target managements, are
driven by the discipline of the underperforming
target management. This is perhaps a simplistic
dichotomy of sources of value in friendly and
hostile acquisitions since empirical evidence
shows that targets of hostile acquisitions do not
underperform targets of friendly acquisitions
British Journal of Management, Vol. 17, S7–S30 (2006)
DOI: 10.1111/j.1467-8551.2006.00476.x
r2006 British Academy of Management
(Franks and Mayer, 1996; Kini, Kracaw and
Mian, 2004). On this evidence the disciplinary
role of hostile acquisitions is questionable.
The disciplinary role of acquisitions is the
corner stone of the market for corporate control.
The efficiency of the market for corporate
control, however, requires that the regulatory
framework governing corporate mergers and
acquisitions is not antagonistic to hostile take-
overs. In the UK, the City Code on Takeovers
and Mergers (the Code) is a benign re
´gime that
does not discriminate against hostile acquisitions.
Indeed, it imposes severe constraints on the
frustrating actions that the incumbent manage-
ment can take (Sudarsanam, 2003, ch. 18).
However, in continental Europe and in many
states in the USA, corporate managers enjoy
enormous powers that enable them to block
hostile takeover bids, thereby emasculating the
market for corporate control.
The well-documented failure of the majority of
acquisitions to create value is often identified in
popular discussion with hostile acquisitions.
Hostile acquirers are depicted as ‘raiders’, ‘asset
strippers’ or ‘plunderers’ that destroy well-estab-
lished companies and devastate communities in
their relentless pursuit of greed. On the other
hand, friendly acquirers seem to get a friendly
press! The relative performance of friendly and
hostile acquirers therefore warrants a rigorous
empirical investigation. Clear evidence of super-
ior value creation in hostile over friendly
acquisitions allows us to judge the efficacy of
the market for corporate control. In this article,
we evaluate the relative shareholder wealth
performance of friendly and hostile acquirers in
the post-acquisition period.
We include in our analysis the performance of
a type of friendly acquirer, the white knight, who
joins the contest when the target is already under
siege by a hostile bidder. The chivalrous white
knight enters the fray in response to the distress
call from the target and can work with the target
management, gain a better understanding of the
target business and accomplish greater synergies
than a hostile bidder denied these advantages. On
the other hand, a white knight enters an auction.
If, as is mostly the case, the white knight wins the
auction, it is likely that its winning bid represents
overpayment and the white knight suffers from a
‘winner’s curse’ and destroys value. A hostile
bidder may be faced with another bidder in the
form of a white knight or another hostile bidder.
If a hostile bidder wins this contest, again it may
suffer from ‘winner’s curse’. Thus the shareholder
value gains or losses to white knight acquirers
and hostile bidders in multi-bidder contests may
reflect potential synergy gains as well as the
impact of the auction. Thus we need to consider
the different types of friendly and hostile
acquirers separately.
In this article we examine the long-term share-
holder wealth performance of four types of
acquirers – friendly bidder without a rival
(‘friendly’), hostile bidder without a rival (‘single
hostile’), white knight bidder with a hostile rival
(‘white knight’) and hostile bidder facing a white
knight or another hostile bidder (‘multiple
hostile’). For a sample of 519 acquisitions of
UK target firms during 1983–1995, we estimate
the three-year post-acquisition gains to share-
holders of the acquirers using three benchmarks.
We find that while these acquirers perform
equally well in terms of their pre-bid shareholder
returns, over the post-acquisition period, the
single hostile acquirers deliver significantly higher
shareholder value than friendly acquirers. They
also deliver higher value than white knights, but
this superiority is model dependent. The auction
characteristic does not result in the white knights
or multiple hostile acquirers performing worse
than their friendly or single hostile counterparts.
We examine the differential characteristics of
these four types of acquirers. These are concerned
with their corporate governance structure, free
cash flow and pre-bid stock market rating. Jensen
(1986) has argued that managers of firms with
free cash flow may be tempted to expend it on
unwise and value-destroying acquisitions. The
corporate governance structure of acquirers may
determine the robustness of their acquisition
strategy and the post-acquisition performance
through its monitoring effectiveness (Byrd and
Hickman, 1992). We also examine the impact of
payment currency for the sample acquisitions
since there is consistent evidence that cash
acquisitions tend to generate higher shareholder
value for acquirers than share exchange offers
(Franks, Harris and Mayer, 1988; Martin, 1996;
Travlos, 1987). We find that friendly acquirers
with high stock-market ratings destroy more
value than hostile acquirers with a similar rating.
Friendly acquirer top managers suffer greater job
losses than those of hostile acquirers, perhaps
S8 S. Sudarsanam and A. A. Mahate

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