Clas Bergström

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.

The Mandatory Bid Rule (MBR) requires that any shareholder who either (i) establishes new control of a firm or (ii) takes over control by transfer of an old block position also extends an offer for the remaining shares at a fair price. For three different ownership structures, the paper analyzes the effect of implementation of a Mandatory Bid Rule on the value of the firm. Implicit in the decision to enact the MBR is a trade-off between a value increasing (decreasing) change in the frequency of takeovers and a value decreasing (increasing) effect due to a lower (higher) expected premium. For the ownership structure where a minority owner establishes now control, we demonstrate the general result that the negative probability effect dominates the positive premium effect, i.e. the value of the firm always decreases if a MBR is implemented. If instead the firm is controlled by a majority owner and control is transferred, we characterize the balance of the two counter-acting effects in general. In particular, if the incumbent majority owner enjoys larger private benefits of control than a potential buyer, we show that it is likely that enactment of the MBR lowers the value of the firm. This result contrasts with that obtained when the firm is atomistically held. In this case, if either the incumbent management team or the rival enjoy private benefits that are much larger than that of the counterparty, the adoption of the MBR is likely to increase the firm value.

A well-functioning market for corporate control is considered by the EC Commission as an important method for monitoring incumbent management and for improving the allocation of resources within Europe. This article examines the regulation of corporate acquisitions in Europe as well as inherent restrictions on takeovers from a law and economics perspective. We find that the European proposals for reform in the proposed 13th Company Law directive do not live up to their promise of encouraging acquisitions. Indeed, we find that the proposed rules inhibit acquisitions in significant ways, and therefore are more likely to result in reduced monitoring of incumbent management and in inefficiencies in the allocation of productive resources in Europe.