Takeover Defenses and Bargaining Power

Authors

  • Guhan Subramanian

    1. Joseph Flom Professor of Law and Business at Harvard Law School.
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      This article is an abridged and updated version of an article originally published in the Yale Law Journal. See Guhan Subramanian, “Bargaining in the Shadow of Takeover Defenses,” Yale Law Journal, Vol. 113, No. 3 (2003). I thank the editors of the Journal of Applied Corporate Finance for their assistance in producing this abridged version. I should note that I served as an expert witness for Oracle Corp. in its hostile takeover bid for PeopleSoft that is discussed in this article.


Abstract

For decades, academics have claimed that even friendly acquisitions are negotiated in the “shadow” of a hostile takeover bid. But interviews with senior M&A investment bankers provide a different picture of negotiated acquisitions. Determining which version is more representative of most deals is important because the academic assumption has been a main pillar of attempts to justify poison pills and other takeover defenses as ways of increasing the bargaining power of target companies' managements and the premiums received by their shareholders.

This article shows that takeover defenses can be justified as a value-maximizing control device in a simplified model with one buyer and one seller. But after taking account of four realities that are present in many if not most corporate M&A deals—alternatives away from the negotiating table (i.e., other potential targets), high costs of launching a hostile bid, information disparities, and managers with divided loyalties—the author demonstrates that only a fraction of friendly acquisitions are in fact negotiated in the shadow of a hostile takeover threat. This conclusion is reinforced by both empirical evidence and the commentary of M&A practitioners presented in the article.

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