1. 1 Takeovers Plan of two lectures: Basic facts Transfers of corporate control and ex-post allocational efficiency Do efficient transfers always occur? Can inefficient transfers occur? What are the modes of control transfers and how is it chosen? Implications of security-voting structure and takeover regulations for social and shareholders’ welfare Ex-ante effects of takeovers Does takeover threat lead to efficient decisions/effort provision by managers and workers? Takeover defenses Methods Consequences for shareholder value

2. 2 Microsoft-Yahoo deal Offer date: Feb 1 2008 Offer price: $31 per Yahoo! Share (cash + MSFT stock) = $44.6 billion for Yahoo! Yahoo! stock price prior to the offer: $19.18

3. 3 Microsoft-Yahoo! deal

4. 4 Basic facts on takeover activity in the world Takeovers come in waves Takeover gains: Combined (target + acquirer) gain for shareholders is positive (short-term) Combined (target + acquirer) gain for shareholders is positive (short-term) Target shareholders’ gain > 0 (short-term) Target shareholders’ gain > 0 (short-term) Acquirer (bidder) shareholders’ gain = 0 (short-term) Acquirer (bidder) shareholders’ gain = 0 (short-term)

5. 5 Merger waves. Percentage of Public Companies Taken Over Each Quarter, 1926–2005

6. 6 Ten Largest Merger Transactions, 1995-2005

7. 7 Hostile Takeovers Definition of a Hostile takeover: a takeover that takes place under resistance of the management (or “controlling” shareholder) Economic rationale for a hostile takeover: Replace bad management and make a profit on an increase in firm value Replace bad management and make a profit on an increase in firm value Mechanism of a hostile takeover: normally a tender offer to the target shareholders to sell their shares to the acquirer

8. 8 (Hostile) takeover as a mechanism of corporate governance Disciplinary role Efficient change in control

9. 9 Who gains from a takeover? Many other studies find similar results Why? Free rider problem among shareholders Free rider problem among shareholders Competition among acquirers Competition among acquirersRemarks: returns for targets are higher in hostile takeovers and tender offers (as opposed to mergers) returns for targets are higher in hostile takeovers and tender offers (as opposed to mergers) returns for acquirers are lower in hostile takeovers returns for acquirers are lower in hostile takeovers

10. 10 What about long-run? Mixed evidence on long-run returns (rather negative than positive) Mixed evidence on post-takeover operating performance Are gains from takeovers initially overestimated on average?