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How Target Shareholders Benefit from Value-Reducing Defensive Strategies in Takeovers

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  • Berkovitch, Elazar
  • Khanna, Naveen

Abstract

This paper shows that target shareholders can be made better-off through the use of certain types of defensive strategies that reduce the value of the target by different amounts for different bidders. In many cases, simply the threat of such strategies can make target shareholders better-off. Therefore, empirical tests based on stock price reactions at the adoption of defensive strategies may be underestimating the effect of such strategies. The paper also identifies the necessary characteristics that make these strategies effective and shows that many observed defenses possess similar properties. Copyright 1990 by American Finance Association.

Suggested Citation

  • Berkovitch, Elazar & Khanna, Naveen, 1990. "How Target Shareholders Benefit from Value-Reducing Defensive Strategies in Takeovers," Journal of Finance, American Finance Association, vol. 45(1), pages 137-156, March.
    • Handle: RePEc:bla:jfinan:v:45:y:1990:i:1:p:137-56
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    Cited by:

    1. Neyland, Jordan & Shekhar, Chander, 2018. "How much is too much? Large termination fees and target distress," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 97-112.
    2. Jin Q Jeon & Cheolwoo Lee, 2014. "Effective Post-Signing Market Check or Window Dressing? The Role of Go-Shop Provisions in M&A Transactions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 210-241, January.
    3. Sarig, Oded H. & Talmor, Eli, 1997. "In defense of defensive measures," Journal of Corporate Finance, Elsevier, vol. 3(3), pages 277-297, June.
    4. Paul Povel & Rajdeep Singh, 2003. "Bidder Asymmetry in Takeover Contests: The Role of Deal Protection Devices," Finance 0311011, University Library of Munich, Germany.
    5. Rosenkranz, Stephanie & Weitzel, Utz, 2007. "Bargaining in Mergers and Termination Fees," CEPR Discussion Papers 6210, C.E.P.R. Discussion Papers.
    6. Yeon-Koo Che & Tracy R. Lewis, 2007. "The role of lockups in takeover contests," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 648-669, September.
    7. Officer, Micah S., 2003. "Termination fees in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 69(3), pages 431-467, September.
    8. Bates, Thomas W. & Lemmon, Michael L., 2003. "Breaking up is hard to do? An analysis of termination fee provisions and merger outcomes," Journal of Financial Economics, Elsevier, vol. 69(3), pages 469-504, September.
    9. Sharon Hannes, 2006. "A Demand-Side Theory of Antitakeover Defenses," The Journal of Legal Studies, University of Chicago Press, vol. 35(2), pages 475-524, June.
    10. Ben Arfa, Nouha & Karmani, Majdi & Labaronne, Daniel, 2017. "Antecedents of hedge fund activism in French listed target firms," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1315-1326.
    11. Kent D Daniel & David Hirshleifer, 2018. "A Theory of Costly Sequential Bidding [Strategic jump bidding in English auctions]," Review of Finance, European Finance Association, vol. 22(5), pages 1631-1665.
    12. Pearce II, John A. & Robinson, Richard Jr., 2004. "Hostile takeover defenses that maximize shareholder wealth," Business Horizons, Elsevier, vol. 47(5), pages 15-24.
    13. Naveen Khanna, 1997. "Optimal Bidding For Tender Offers," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 323-342, September.
    14. Dasgupta, Sudipto & Tsui, Kevin, 2003. "A "matching auction" for targets with heterogeneous bidders," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 331-364, October.
    15. S. Rosenkranz & U. Weitzel, 2005. "Bargaining in Mergers: The Role of Outside Options and Termination Provisions," Working Papers 05-32, Utrecht School of Economics.
    16. Larkin, Yelena & Lyandres, Evgeny, 2019. "Inefficient mergers," Journal of Banking & Finance, Elsevier, vol. 108(C).
    17. Sridhar Gogineni & Pawan Jain, 2021. "The Role of Target Termination Fees in REIT Mergers," The Journal of Real Estate Finance and Economics, Springer, vol. 63(1), pages 1-39, July.
    18. James M. Mahoney & Joseph T. Mahoney, 1993. "Abstract," Strategic Management Journal, Wiley Blackwell, vol. 14(1), pages 17-31, January.
    19. Corum, Adrian Aycan & Levit, Doron, 2019. "Corporate control activism," Journal of Financial Economics, Elsevier, vol. 133(1), pages 1-17.
    20. James M. Mahoney & Joseph T. Mahoney & Chamu Sundaramurthy, 1995. "The differential impact on stockholder wealth of various antitakeover provisions," Research Paper 9512, Federal Reserve Bank of New York.
    21. Levit, Doron, 2017. "Advising shareholders in takeovers," Journal of Financial Economics, Elsevier, vol. 126(3), pages 614-634.
    22. Burch, Timothy R., 2001. "Locking out rival bidders: The use of lockup options in corporate mergers," Journal of Financial Economics, Elsevier, vol. 60(1), pages 103-141, April.
    23. Rosato, Antonio, 2008. "“Matching Auctions” for Hostile Takeovers: A Model with Endogenous Target," MPRA Paper 15083, University Library of Munich, Germany, revised 07 Jan 2009.
    24. Carline, Nicholas F. & Linn, Scott C. & Yadav, Pradeep K., 2014. "Corporate governance and the nature of takeover resistance," CFR Working Papers 14-01, University of Cologne, Centre for Financial Research (CFR).

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