The influence of professional investors on the failure of management buyout attempts

Abstract

In a sample of 111 MBO offers between 1984 and 1987, almost 30% attract new blockholders. These blockholders are primarily professional investors who act to facilitate a takeover by a higher bidder, thus increasing returns to both themselves and other public shareholders. In contrast, I find little evidence that pre-existing blockholders, particularly institutional holders, affect either the offer outcome or actively participate in the buyout contest once it begins. The overall pattern of results suggests that professional investors, particularly equity-holding companies, are 'control specialists' who provide valuable services as brokers in the market for corporate control.

MBO Financing Risks And Managers' Use Of Anti-Takeover Measures

“…Furthermore, as the risks managers face increase, the price that they will want to purchase the firm at needs to be even lower to increase their post-buyout return. Yet, a lower offer is more likely to attract competitive bidders that do not face the same fmancing risks as the managers (see Lowenstein, 1985;Hirshleifer and Png, 1990;and Peck, 1996). But because the participation in the MBO is potentially riskier, managers will be less willing to match or trump an outsider's higher bid as a way to retain control of the firm.…”

“…Announcements of these measures are associated with a signifIcantly positive stock price reaction and the likelihood of a competitive bid higher than management's offer is higher after managers have taken anti-takeover actions. The use of anti-takeover measures increases the fmal price offered by a successful competitive bidder but does not increase the likelihood that managers will acquire the fIrm nor does it decrease the incidence or extent of revisions in management's initial offer which commonly occurs during an MBO contest (see Peck, 1996). Thus the evidence suggests that anti-takeover measures are ineffective in protecting a low offer and that managers are more likely to use these measures as a bargaining device to increase the takeover premium.…”

“…The sample includes only those offers made for the entire fum and excludes offers for divisions. The data set used here is an extension of the data used in Peck (1996) and includes 111 MBO attempts between 1984 and 1987 announced in the Wall Street Journal or the Dow Jones News Wire that meet the data requirements of this study.…”

“…In about a quarter of MBO offers management ends up losing control of the firm and it is eventually taken over by an outside bidder (see Kaplan, 1989;and Peck, 1996). Thus, management sometimes adopts anti-takeover measures during their attempt to buyout the firm (see Peck, 1996).…”

“…In about a quarter of MBO offers management ends up losing control of the firm and it is eventually taken over by an outside bidder (see Kaplan, 1989;and Peck, 1996). Thus, management sometimes adopts anti-takeover measures during their attempt to buyout the firm (see Peck, 1996). Here managerial "entrenchment" takes the form, not of protecting management's jobs per se, but rather of protecting managements' offer, since management can only lose control of the firm if they fail to match or trump a higher offer.…”