NCPA - National Center for Policy Analysis

Threat of Hostile Takeover Improves Corporate Management

June 26, 2002

The market has a mechanism for disciplining poor corporate governance, management analysts point out. It's called the hostile takeover.

  • If a corporation is badly enough managed, its share price will decline relative to other companies in the industry.
  • At that point, it can be profitable for a new group to make a tender offer, bringing in more efficient leadership.
  • Just the threat of a takeover provides incentives for managers to run companies for the benefit of their shareholders.

But the natural check of a takeover threat has been diluted by congressional, regulatory and judicial actions over the past twenty years, observers say.

  • In 1968, Congress passed the Williams Act, which made it vastly more expensive for outsiders to mount successful tender offers -- and the highly profitable element of surprise was removed entirely.
  • State legislatures and state courts in the 1980s further weakened the prospects for takeovers.
  • As a result, the number of hostile tender offers dropped precipitously -- declining to 4 percent from 14 percent of all mergers.

The solution, observers argue, is to repeal and reverse all the many statutes, rules and case holdings that interfere with tender offers. Unfortunately, that is not likely to happen -- and a valuable incentive to better corporate management will continue to be lost.

Source: Henry G. Manne (George Mason University School of Law), "Bring Back the Hostile Takeover," Wall Street Journal, June 26, 2002.


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