Tests of a New Theory of Strategic Blocking by Large Shareholders and Arbitrageurs in Takeovers

This paper develops and tests a theory that explains the skewed distribution of the takeover gain heavily in favor of the target shareholders by considering the interacting effects of a concentrated target ownership structure; legal restrictions like the equal treatment principle and the compulsory acquisition proviso; as well as the potential presence of arbitrageurs. Thje idea is that large incumbent shareholders with the option to block a takeover attempt exercise a strategic influence on the tender offer prices, and, thereby, on the distribution of the gain. Initially, the concentrated target ownership structure is assumed to be exogenously given, but the presumption is later partially endoginized by considering the effects of potential arbitrageurs. We perform two sets of tests of the theory'simplication that the relative distribution of the takeover gain only depends on two ownerdhip structure parameters: the size of the bidder's towhold and the average ownership position of the pivotal target blockholders. If the potential effect of arbitrageurs is taken into account, the theory's predictions of the distribution of the synergyt gain are not rejected in the first battery of tests on Swedish data. Moreover, since the theory incorporates institutional characteristics that are pertinent, expecially for European takeover markets, we expect it to possess explanatory power over a wider empirical range. Furthermore, conducting a second set of more general regression tests along the lines of Stulz, Walking and Song (1990) of how the target ownership structure affects the distribvuion of the takeover gain, we show that their results on U.S. data in terms of significant variables and signs carry over to our Swedish sample. Moreover, when we add the crucial bargaining parameter derived in our model to the explanatory variables, it has significant explanatory power, in particular when the total takeover gain is positive. Accordingly, the characteristic features of the theory developed in this paper is that it models how institutional parameters like the legal framework and the assumptions about the ownership structure of the target corporation interact in determining the distribution of the takeover gain with the blocking idea as the crucial common element, and that it has empirical validity.