Corporate Governance and Regulatory Impact on Mergers and Acquisitions

5

Whither hostility?

William W. Bratton

Abstract

The hostile takeover and the regulatory barriers impeding it have for decades held

a central place in policy discussions respecting U.S. corporate law. The hostile

takeover’s proponents assume that it belongs to an identifiable class of disciplinary

mergers that create value by separating poor managers from valuable assets. The

opponents question the productivity assertion even as they simultaneously assert

that hostile takeovers amount to a threat necessitating regulatory barriers.

Hostility lost its salient role in the U.S. merger market due to the recovery of stock

market prices and constraints on the availability of debt capital. In the changed

environment, cooperation made better cost sense. Antitakeover regulation cannot

be dismissed as irrelevant, for it raises the cost of hostility. But results yielded by

studies of target characteristics and merger motivation suggest that any negative

consequences for economic welfare are modest. Meanwhile, hostility recently has

returned in the form of hedge fund shareholder activism. Now governance and the

boardroom are the venues, rather than the market for corporate control.

5.1 Introduction

The hostile takeover has for decades held a central place in policy discussions

respecting U.S. corporate law. Its proponents make it the lynchpin of an effi-

cient, market-driven governance framework (Bebchuk, 2002). Opponents see

a destabilizing force that impairs the operation of corporate institutions (Blair,

2004; Stout, 2003). Their debate devolves on legally sanctioned antitakeover

barriers like poison pills and staggered boards, which make hostile takeovers

more expensive and thereby reduce their incidence. Remove the barriers, say the

proponents, and market discipline finally will make the corporate governance

system work. Leave them in place, say the opponents, to prevent rapacious

raiders from tearing asunder productive firms.

This chapter intervenes in the debate to suggest that the participants consider

the implications of a line of empirical studies. The proponents assume that hostile

takeovers belong to an identifiable class of mergers that create value by separat-

ing poor managers from valuable assets. The opponents question the productivity

assertion even as they simultaneously assert that hostile takeovers amount to a

threat necessitating regulatory barriers. Meanwhile, economists have been testing

merger and governance data for a quarter century to verify that mergers actually