A Bargaining Model of Friendly and Hostile Takeovers

Abstract

A bargaining model is developed that characterizes the conditions under which a takeover will either be friendly, hostile, or unsuccessful when the target management can tilt the selling procedure toward a white knight. The conditions considered mainly involve private control benefits, toehold size, and breakup fees. Also established by the model are the conditions for an efficient takeover. The proposed framework of strong management influence on takeover outcome, an alternative modeling of hostility and the adoption of a negotiation procedure, rather than an auction setup with strong shareholder influence as in most of the existing literature, delivers new insights into the US market of corporate control, which are consistent with the available evidence

Motives and Consequences of White Knight Takeovers

“…Specifically, the transaction value offered by white knight bidders is higher than the one offered by the hostile bidders. These results are consistent with the Loyola and Portilla () prediction about transaction value and the success rate of white knight bidders. This suggests a gain for the target firm's shareholders.…”

“…Specifically, firm size may indicate a tendency toward empire building, and FCF may indicate agency costs. Loyola and Portilla () develop a theoretical model in which corporate governance is weak. One of the predictions of their theoretical model is that “weak corporate governance also rules out the organization of an alternative auction‐based procedure.…”

Kraft's acquisition of Cadbury: Was it an amicable transatlantic merger or a hostile takeover?

“…The Kraft–Cadbury case sheds light on two distinct corporate cultures that operated on both sides of the Atlantic. Regarding corporate control, market power, and takeovers (Korman, ; Loyola & Portilla, ; Patrone, ; Trichterborn, Knyphausen‐Aufseß, & Schweizer, ), the case demonstrates how mergers can be influenced by outside actors that may have different agendas in negotiations. In this process, we often witness the role and influence of corporate and social “actors, resources, activities, and commitments” (Lenney & Easton, , p. 553).…”