BUSI 536 Week 3 Group Discussion Board Forum 1 Example

Group Discussion Board Forum 1: Antitakeover Measures and Takeover Tactics

BUSI 536 Mergers & Acquisitions, Group Discussion Board Forum 1 Thread and Replies

Thread by [Student Name]

The forum topic and the two classmates are composites standing in for the course's own topic; the textbook, the research and the Scripture cited are real, and the requirements follow Liberty's public course guide for BUSI 536.

Thread

When a company receives an unsolicited bid, its board must decide whether to negotiate, resist or let shareholders decide. Gaughan (2018) frames every defense through two competing hypotheses. Under the management entrenchment hypothesis, defenses protect directors and executives from losing their positions, at shareholders' expense. Under the stockholder interests hypothesis, defenses give the board bargaining power to extract a higher price than a bidder would otherwise pay. My position is that the evidence supports the second hypothesis for poison pills used alone and the first for pills combined with staggered boards.

Consider the poison pill first. A pill allows shareholders other than the bidder to buy shares at a deep discount once the bidder crosses an ownership threshold, which makes a hostile acquisition prohibitively expensive unless the board redeems the pill. In principle, that is a powerful weapon. In practice, Comment and Schwert (1995) found that poison pills and similar laws had not systematically deterred takeovers, even though most listed companies were covered by one, and that pills were associated with higher takeover premiums for selling shareholders. A pill, in other words, usually changes the price rather than the outcome. Because a board can redeem it, a bidder can still make its case, and if shareholders are persuaded, the board faces pressure to negotiate.

The staggered board changes that calculation. When directors serve three-year terms in classes, a bidder must win two annual elections before it can replace a majority and remove the pill, a delay of a year or more that most bidders will not accept. Bebchuk et al. (2002) found that an effective staggered board nearly doubled the odds that a hostile target remained independent and that shareholders of targets that stayed independent were worse off than those of targets that were acquired. The combination turns a bargaining tool into a barrier. Gaughan (2018) notes that many large companies have declassified their boards under shareholder pressure in recent decades, which suggests that institutional investors have reached the same conclusion. A company that keeps both defenses is telling its owners, in effect, that the board will decide whether they may sell, a position difficult to reconcile with the directors' duty to the people who elected them.

Jesus's parable of the faithful manager offers a test for directors. Jesus asks who the faithful and wise manager is, the one a master puts in charge of his household to feed its members when food is due, and He calls that servant blessed if the master returns to find him doing exactly that (English Standard Version Bible, 2001/2016, Luke 12:42-43). The manager in the parable is entrusted with what belongs to someone else and judged by whether he used it for the household's good. A board is in the same position. A defense that wins shareholders a better price is faithful stewardship; a defense that keeps the stewards in office against the owners' wishes is not.

My recommendation follows. A board can reasonably hold a pill, or adopt one when a bid arrives, to buy time and negotiate. It should not combine the pill with a staggered board, and it should put any long-term defense to a shareholder vote, so that the owners decide how much protection their stewards may use.

Reply to Rachel

Rachel, your thread argued that hostile bidders are usually corporate raiders who profit by breaking up healthy companies, and that defenses are therefore a necessary protection. I agree that some hostile bids in the 1980s fit that description, and your example of a conglomerate sold off in pieces was vivid. But the research suggests that the hostile label tells us less than it seems.

The evidence on returns favors target shareholders. Jensen and Ruback (1983), reviewing the early studies of the market for corporate control, found that target shareholders earned large positive abnormal returns in successful takeovers, around 30 percent in tender offers and 20 percent in mergers, while bidding firms earned modest or zero returns. If hostile bids routinely destroyed value, target shareholders would not have gained so much. Schwert (2000) then asked whether hostile and friendly deals actually differ economically. He found that most deals the press described as hostile could not be distinguished from friendly deals using accounting and stock price data; the main difference was that hostile deals involved public bargaining. Hostility, in his words, may be in the eyes of the beholder, a negotiating posture rather than a different kind of transaction.

That finding matters for your argument. If a hostile bid is often an opening move in a negotiation that the target's board has refused to begin privately, then defenses designed to stop hostile bids altogether may also stop negotiations that would have benefited shareholders. The better question is not whether a bid is hostile but whether the price is fair and the shareholders have a chance to decide. Your conglomerate example might even support this view: if the pieces were worth more separately than together, the breakup released value that the old structure had been hiding, and the shareholders who sold to the raider were paid for it.

Scripture speaks to the honesty that hostile bargaining often lacks. Jesus taught that His followers' simple word, yes or no, should carry its full weight, with no need for oaths to make their words sound more binding than they are (Matthew 5:37). Both sides in a takeover contest are tempted to say more than they mean: bidders who overstate the synergies they will pay for, and boards who claim that any offer undervalues the company. A target board that answers a bid with a plain statement of what price it would accept, and why, honors that teaching and its shareholders better than one that simply refuses.

I would also agree with you on one point. Some bids are timed to exploit a temporary drop in the target's share price, and a board is right to resist those. Gaughan (2018) notes that defenses can give boards time to show shareholders the company's real value. Would you support a defense that expires automatically after a set period, giving the board time to respond without blocking a fair offer permanently?

Reply to Owen

Owen, your thread made a strong case that proxy fights and activist shareholders have replaced the hostile tender offer as the main disciplinary force in corporate governance, and I agreed with your point that activists rarely need to buy a whole company to change one. I want to add evidence that activism often benefits shareholders and to note one limit.

Brav et al. (2008) studied activist hedge funds in the United States from 2001 to 2006 and found that they succeeded or partly succeeded in about two thirds of their campaigns. The market reacted to the announcement of activism with an abnormal return of about 7 percent that did not reverse over the following year, and target firms afterward increased payouts, improved operating performance and replaced chief executives more often. Klein and Zur (2009) found similar results for confrontational campaigns by hedge funds and other private investors: positive market reactions, positive returns over the following year and high rates of success, often through real or threatened proxy contests. Interestingly, they found that hedge funds tended to target profitable firms with excess cash, which suggests that activists address the same free cash flow problem that hostile bidders once did.

The connection to this week's chapters is direct. A staggered board protects incumbents against activists just as it does against bidders, because an activist running a proxy contest can win only a minority of seats in any one year. That is one reason many shareholder proposals in recent years have sought to declassify boards. Activists also benefit when companies have adopted majority voting for directors, since a campaign to withhold votes can then remove a director even without a full proxy contest, a tool that did not exist in the era of hostile tender offers.

The limit I would add is that activists are not always right. Their interest is in the value of shares they may hold for a year or two, and some campaigns push for cuts in research or investment that may help the share price now at the expense of later years. Proverbs offers balanced counsel here, warning that a people without guidance falls and finding safety where advisers are many (Proverbs 11:14). An activist is one more counselor, often a well-informed one. A wise board listens seriously to that counsel, especially when the activist has studied the company closely and arrives with specific proposals, and weighs it against the views of long-term holders, employees and its own knowledge of the business, rather than either fighting every activist or yielding to every demand.

Do you think boards should be required to meet with any shareholder above a certain ownership threshold, or would that hand activists too much sway over management? I am curious whether your company example had any experience with such a meeting.

References

Bebchuk, L. A., Coates, J. C., IV, & Subramanian, G. (2002). The powerful antitakeover force of staggered boards: Theory, evidence, and policy. Stanford Law Review, 54(5), 887-951. https://doi.org/10.2307/1229689

Brav, A., Jiang, W., Partnoy, F., & Thomas, R. (2008). Hedge fund activism, corporate governance, and firm performance. The Journal of Finance, 63(4), 1729-1775. https://doi.org/10.1111/j.1540-6261.2008.01373.x

Comment, R., & Schwert, G. W. (1995). Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measures. Journal of Financial Economics, 39(1), 3-43. https://doi.org/10.1016/0304-405X(94)00823-J

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Gaughan, P. A. (2018). Mergers, acquisitions, and corporate restructurings (7th ed.). Wiley.

Jensen, M. C., & Ruback, R. S. (1983). The market for corporate control: The scientific evidence. Journal of Financial Economics, 11(1-4), 5-50. https://doi.org/10.1016/0304-405X(83)90004-1

Klein, A., & Zur, E. (2009). Entrepreneurial shareholder activism: Hedge funds and other private investors. The Journal of Finance, 64(1), 187-229. https://doi.org/10.1111/j.1540-6261.2008.01432.x

Schwert, G. W. (2000). Hostility in takeovers: In the eyes of the beholder? The Journal of Finance, 55(6), 2599-2640. https://doi.org/10.1111/0022-1082.00301