The Long-Run Performance of Hostile Takeovers: UK Evidence

This paper examines the long-run pre- and post-takeover performance of hostile takeovers in the U.K. from 1985-96. Prior to takeover, targets in hostile takeovers experience a significant deterioration in profit returns, and significantly negative share returns. However, there is little evidence that profit levels are lower than those of non- merging firms. Bidders in hostile takeovers are not superior performers in terms of profit levels, although share returns are significantly high prior to takeover. However, in the post-takeover period hostile takeovers show significant improvements in profit returns, which are associated with significant asset disposals. In contrast, friendly takeovers do not improve profit returns and result in significantly negative long-run share returns. We find no evidence of an inverse relation between the performance improvement in hostile takeovers and the pre-takeover performance of the target. We interpret the results to indicate that although hostile takeovers improve performance, there is little evidence that they play an important role in reversing the nonvalue maximizing behaviour of target companies.