Hostile Takeovers

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Hostile Takeovers

and the disciplinary hypothesis

5/2/2008

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Abstract

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Introduction

ergers and acquisitions have been a popular subject in literature the last few centuries. Almost everything one can think of has been analyzed and written about. By now, it is well known that target firm shareholders earn positive and statistically significant wealth gains at the time of announcement of the takeover. For bidding firm shareholders, the results vary. One aspect of takeovers and announcement returns has been less popular in recent literature; hostile takeovers. Takeovers are considered hostile when the boards of directors of the target company try to fight off the bid and in turn will recommend to the shareholders not to accept the bidders offer (Raj and Forsyth 2002). In the market for corporate control, hostile takeovers are seen as one of the most important disciplining devices for managers who do not maximize firm value. Such practices might include excessive growth and diversification, overpayment of employees and suppliers, or debt avoidance to secure a quiet life. Because hostile takeovers are essential takeovers designed to replace or change the policies of managers who do not maximize shareholder value, the actual merger of the two firms is not really essential. The takeover is only the most efficient way to change control and with it the target’s operating strategy (Morck et al 1988). This is the opposite of a friendly takeover which is recommended by the boards of directors and is essentially driven by synergy consideration from combining the two businesses which can be for instance: increases in market power, from offsetting profits of one firm with tax loss carry forwards of the other, from combining R&D labs or marketing networks, or simply eliminating functions that are common to the two firms. The combination of the two businesses is thus essential for the realization of the gains in friendly takeovers (Morck et al 1988). The existing literature argues that hostile takeovers earn higher returns to bidding firms shareholders than friendly takeovers in long run performance as well as in announcement date returns (cosh et al 2001; Raj et al 2002; Sandarsanam et al 2006).

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Two questions remain concerning the hostile takeover debate: Are hostile takeover really more profitable to bidding firm shareholders than friendly takeovers and is the disciplinary hypothesis true and therefore the reason that hostile takeovers exist.

To test if hostile takeovers are more profitable than friendly takeovers, standard event study methodology can be used to see if the abnormal returns differ significantly. Of course, the sample must be corrected for method of payment, deal size, firm size and industry differences.

The disciplinary hypothesis can be tested in several ways. First, bad share price performance prior to the hostile takeover could indicate bad management and therefore support the disciplinary hypothesis. This line of reasoning dates back to Manne (1965) who stated: As an existing company is poorly managed, the market price of the shares declines relative to the shares of other companies in the same industry or relative to the market as a whole. The lower the stock price, relative to what it could be with more efficient management, the more attractive the takeover becomes to those who believe that they can manage the company more efficiently (Manne, 1965, pp. 112-113). Second, declining profits preceding the hostile takeover could also indicate bad governance (Martin et al 1991, Cosh et al 2001). Third, higher turnover amongst top management after hostile takeovers opposed to friendly takeovers (Sandarsanam et al 2006, Franks et al 1996, Martin et al 1991, Raj et al 2002). Fourth, large job cuts or asset disposals could indicate an inefficient operating performance and hence bad performance by top managers (Raj et al 2002, Cosh et al 2001).

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Hypothesis’, which posits that the gains to target shareholders represent wealth transfers from acquiring firms’ shareholders and not synergistic gains. Therefore the share price of a friendly takeover should decline after the takeover, because value is destroyed or transferred to the target firm shareholders. Hostile takeovers however, ad value because no synergies have to be realized, since bad governance is the main motive for takeover. Therefore, the disciplinary hypothesis is supported when friendly takeovers share price performance declines in the long run (since synergies are not realized) and hostile takeover share price performance should rise in the long run (since value is directly added by removing the bad governance component of the acquired firm). The disciplinary hypothesis could also be supported by higher earnings of hostile takeover acquiring firms (profits are directly added to the group profit) and lower earnings after the takeover of friendly takeover acquiring firms (higher costs to implement synergy creating mechanisms).

The objective of this paper is to see if hostile takeovers are really more profitable then friendly takeovers and if the main reason for hostile takeovers is the disciplinary effect. Since different conclusions have been made in the past, this paper could bring new insights in both topics using different sample sizes and more variables for explanation.

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Literature review

Wealth effects to hostile bidding firm shareholders

ostile takeovers have mainly been addressed in literature as a disciplining device in the market of corporate control. However, not much has been published on the subject of hostile bidders’ performance before and after the hostile takeover. Raj and Forsyth (2002) examined the wealth effects to both bidders and targets involved in hostile takeovers and compared them to friendly takeovers of similar size. The short-term effects were studied in addition to the pre- and post-acquisition long-term impact. The results indicate that in the longer long-term hostile bidders perform relatively well in the post-acquisition period whereas friendly bidder shareholders suffer significantly large losses. They seek the answer for better performance in the disciplinary hypothesis, because they find that hostile takeovers result in high turnover amongst the top management of the target firm acquired. There is also significant restructuring within the company, such as major disposal of assets, plant closures and large job cuts. These findings seem to support the disciplinary hypothesis. However, the pre-bid performance of firms targeted in a hostile manner is no worse than friendly target firms. In a more recent article, Sandarsanam and Mahate (2006) examine the long-term shareholder wealth performance of four types of acquirers – friendly bidder, hostile bidder, white knight and hostile bidder facing a white knight or another hostile bidder. They estimated the three-year post acquisition gains to acquirer shareholders and found that hostile acquirers deliver significantly higher shareholder value than friendly acquirers. They also found that friendly acquirers with high stock-market ratings destroyed more value than hostile acquirers with a similar rating. Friendly acquirer top managers suffered greater job losses than those of hostile acquirers, perhaps paying the price for their inferior value-creation performance. Furthermore, they provide evidence of the superior value-value-creation performance of hostile acquirers and make the case against takeover regulatory rules that may impede hostile takeovers. This theory is supported by Bhagat et al (1990) who find

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evidence that hostile takeovers do not result in massive employment cuts in acquiring companies. State anti-takeover laws that aim to stop takeovers to protect blue-collar workers are misguided. Since such laws probably stop more takeovers that foster specialization of corporations, they are likely to reduce efficiency.

Wealth effects to friendly bidding firm shareholders

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abnormal (or market-adjusted) returns to buyer shareholders from M&A activity are essentially zero. (See table III, pp. 53-55, Bruner (2002))

Friendly vs. hostile acquirers

Goergen and Renneboog (2002) show that the type of takeover bid has a large impact on the short term-wealth effects of target and bidder shareholders with hostile takeovers triggering substantially larger price reactions than friendly mergers and acquisitions. Huang and Walkling (1987) also found that resisted offers are associated with higher returns than unresisted offers. However, these results were insignificant. On the other hand, Healy et al (1997) show that strategic takeovers generated substantial gains for acquirers. Hostile takeovers, which they named financial transactions, broke even at best. The premiums in strategic takeovers were lower than in financial deals and the synergies were higher, indicating that strategic acquirers were able to pay less to get more.

Disciplinary hypothesis

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However, the superior performance of hostile takeovers does not hold when the method of payment is taken into account, and it appears that this performance may be the result of a correlation with cash acquisitions In all, Cosh et al (2001) interpret the results to indicate that, although hostile takeovers improve performance, there is little evidence that they play an important role in reversing the non value maximizing behavior of target companies. Sinha (2004) also studied the disciplinary hypothesis and did not find any evidence to support the theory that firms with relatively ineffective internal governance structure are the likely targets for hostile takeover bids. Agrawal and Jaffe (2002) studied the literature on the disciplinary hypothesis, or inefficient management hypothesis as they call it, and end up with the same conclusion; overall, they do not find much empirical evidence in support of the disciplinary motive for takeovers.

Franks and Mayer (1996) examined two factors for the disciplining function of hostile takeovers. First, whether hostile takeovers are associated with the dismissal of the target’s management and second if hostile takeovers are associated with poor performance before the bid. They conclude that hostile takeovers are not motivated by poor past performance of target companies. Target companies seem to be average performers in comparison to other quoted companies. Similarly, they do not find evidence that suggests a relation between poor past performance and boardroom change after the bid. They do find some evidence that target management refuses to re-deploy assets into the best use in future. They found significant asset sales post takeover in both successful and failed hostile takeovers.

Other authors like Martin and McConnell (1991) have different conclusions. They investigated, through tender offers, the hypothesis that an important role of corporate takeovers is to discipline the top managers of poorly performing target firms. They found that that both the top management turnover significantly increases after the takeover and that the firms that were taken over were significantly under-performing other firms in their industry as well as other target firms which had no post-takeover change in the top executive. So they conclude that takeovers play an important role in the market of corporate control.

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friendly takeovers. With these observations in mind the following hypotheses can be formulated;

H1: Hostile takeovers generate higher abnormal returns on the announcement date than friendly takeovers

H2: In the long term (1 year), hostile takeovers generate higher abnormal returns than friendly takeovers

H3: Disciplinary takeovers are not the main reason of the hostile takeovers

A summary of the presented literature will be shown in table I. Table I

Previous research

Table I summarizes all the previous research. Author Location Period Sample

Size

Methodology Event Window (days) Raj et al (2002) U.K. 1990-98 31 Event study

methodology

(-15,+15)

Sandarsanam et al (2006)

U.K. 1983–95 519 Event study methodology. (-20,+40) Bhagat et al (1990) World wide 1984-86 62 Ordinary least squares regression none Goergen et al (2002)

E.U. 1993-00 185 Event study methodology

(-90,+90)

Campa et al (2004) E.U. 1998-00 262 Event study methodology

(-30,30)

Asquith et al (1983)

U.S. 1963-79 156 Event study methodology

(-20,+20)

Jarrell et al (1989) U.S. 1963-86 461 Event study methodology

(-5,+5)

Agrawal et al (1992)

U.S. 1955-87 765 Event study methodology

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Huang et al (1987) U.S. 1977-82 204 Event study methodology

(-1,0)

Healy et al (1997) U.S. 1979-84 50 Event study methodology

Years (-5,+5) Cosh et al (2001) U.K. 1985-96 64 Accounting

studies and Event study methodology

none

Sinha (2004) U.K. 1988-89 218 Own model, based on the OLS

model

none

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Data

This section discusses the data and methodology. The data source and the construction of the different samples will be discussed first. The second section will describe the characteristics of the data.

Data source and sample construction

sample of successful hostile takeovers by worldwide public firms from 1996 to 2007 was obtained from Zephyr. All the deal characteristics were gathered from Zephyr. Daily share price data (RI) and Earnings net income before extraordinary items were collected from Datastream and Factset. Furthermore, the Market- and Risk Adjusted Return model used in this study uses a market as a benchmark for the share performance. In this case, to be as accurate as possible, the exchange on which the security is listed is used as a benchmark. The daily price data of the different exchanges is also taken from the Datastream database. The calculations are made using Excel, Eviews and SPSS.

Because this paper uses two different samples, these samples will discussed separately, since different search criteria apply to these different datasets.

Friendly vs. hostile acquirers

Several criteria have been applied to narrow the scope of the study. These criteria are: • The target and the acquirer must be listed

• Only deals of 5 million Euro and more are used

• Only completed deals are used (this way, post event effects can be studied as well) • All takeovers must be:

o Hostile; Hostile bid according to Zephyr: A deal becomes hostile when the management board of the target company does not recommend the bid to its shareholders. The offer only becomes hostile when the board rejects

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it; up to then it is only an unsolicited offer. Only to be used in a Public Takeover.

o Hostile initially, became recommended: This is a bid which was initially rejected by the board, but became recommended afterwards.

Table II

Sample construction: hostile vs. friendly takeovers

Table II shows the construction of the sample used to test the effect of hostile versus friendly takeovers. The selection criteria impact and reduce the sample. Also data unavailability impacts and reduces the sample size. After implementation of the criteria, 50 events remain for hostile takeovers as well as friendly takeovers.

Criteria Events left

Only completed deals Only deals of 5 mln or more

The acquirer and the target must be listed

351,972 111,148 2,512 Only hostile and initially hostile takeovers 160

Events with available data 47

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Disciplinary hypothesis

Table III

Sample construction: disciplinary hypothesis

Table IV shows the construction of the sample used to test the disciplinary hypothesis. The selection criteria impact and reduce the sample. Also data unavailability impacts and reduces the sample size. After implementation of the criteria 24 events remain.

Criteria Events left

Only completed deals Only deals of 5 mln or more

The acquirer and the target must be listed

351,972 111,148 2,512 Only hostile and initially hostile takeovers 160

Events with available data 24

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Table IV

Descriptive statistics of the estimation window for hostile takeover acquirers, friendly takeover acquirers and hostile targets

Table III shows the descriptive statistics. The skewness and the kurtosis are used to calculate the Jarque-Bera test for normality. The data is normally distributed if the probability is above 0,05 at a 5% significance.

Statistic Hostile Friendly Hos. vs

Friendly Hostile Targets Mean -0,0001 0,0000 -0,0001 0,0002 Median -0,0007 -0,0001 -0,0000 0,0002 Maximum 0,0082 0,0126 0,0188 0,1729 Minimum -0,0075 -0,0116 -0,0145 -0,0143 Std. Dev. 0,0032 0,0037 0,0052 0,0057 Skewness 0,3183 0,3712 0,1437 0,1528 Kurtosis 2,7585 4,2308 4,0010 2,9381 Jarque-Bera 2,2991 10,2425 5,4676 1,0492 Probability 0,3168 0,0060 0,0650 0,5918 Observations 119 119 119 259 Data characteristics

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Table V Events per country

Table VI shows the number of deals per country and the percentage of the total number of deals. The table is divided in friendly acquirers, hostile acquirers and hostile targets. * Other countries include: Austria, Belgium, Brazil, Denmark, Finland, Ireland, Italy, Japan, Luxemburg, Netherlands, New Zeeland, Peru, Portugal and Singapore. These countries have a maximum of 1 event.

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Table VI Events per year

Table VII shows the number of events per year and the percentage of the total number of deals. The table is divided in friendly acquirers, hostile acquirers and hostile targets.

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Methodology

Event study

o examine the differences between the share price effects of friendly and hostile takeovers, the event study methodology as proposed by Brown and Warner (1980,1985) and Mackinlay (1997) is used. The methodology uses an estimation window, an event date and a post-event window. The estimation window is used to calculate the normal return before the event date; this is the return if no event occurs. The event window is used to see if there is any share price reaction around the news of a takeover. The event date is the day of the takeover announcement. The post-event window is used to detect any post-post-event abnormal returns, to see if any effects after the takeover can be observed. In this study a long term effect might be present and therefore a year (360 days without the weekends is 260 days) will be added after the takeover announcement.

Figure 1 shows the timeline:

Figure I

Timeline used in the event study for hostile and friendly acquirers

This figure describes the timeline used for the event study hostile and friendly acquirers. The timeline uses an estimation window, event window and a post-event window. The event day is the announcement date of the takeover.

In this paper the ‘Market and Risk Adjusted Return Model’, also known on the OLS Market Model, is used to calculate the abnormal returns on the event date. This model incorporates both the individual risk of the firm and the overall risk of the market. Let R_it

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designate the observed arithmetic return for security i at day t. Define A as the abnormal _it return for security i at day t. For every security, the abnormal return for each day in the

event period is estimated using the following procedure (Brown and Warner, 1985): A_it =R_it −αˆ −_i βˆ_iR_mt (1) where αˆ and _i βˆ are OLS values from the estimation period. i

The abnormal returns of the n bidder in each group (hostile/friendly) are collected to determine the average abnormal return for each day (Raj and Forsyth, 2002):

n AR AAR n i it t

∑

− = 1 ₍₂₎

The final step is to calculate the cumulative average abnormal return for each day over the entire event window (Raj and Forsyth, 2002):

∑

+ − = days days t AAR CAAR (3)

The AARs are examined to see if there are any significant effects on specific dates in the event window. In this study, the CAARs are used to detect any significant differences in the long term returns and to test different time frames around the event date.

Disciplinary hypothesis

Share price performance of hostile targets

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announcement date could bias the trend upwards. The timeline is shown in figure 2 below.

Figure II

Timeline for event study of hostile targets

This timeline does not have a post-event window, since the research of this paper is restricted to the period before the event day.

Earnings of targets and acquirers

Declining income preceding the hostile takeover could indicate bad governance. Furthermore, declining earnings of the friendly takeover acquiring firm and improving earnings of the hostile takeover acquiring firm could also provide evidence for the disciplinary hypothesis. To test whether the earnings of hostile targets show a negative trend, the net income before extraordinary items (NIBEI) will be examined. This figure is used, because it represents the earnings of the ongoing operations. The targets must show declining earnings prior to the takeover to justify the disciplinary hypothesis. The percentage change in the NIBEI 3 years before the takeover is used to see if operating earnings are declining. The average NIBEI is calculated by summing up all the individual NIBEIs and dividing them by the number of firms:

%∆ =∑ %∆ (4)

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Different tests

Test for normality

To test for normality, the Jargue-Bera test is normally used. The Jarque-Bera (JB) test is based on the kurtosis and skewness of the sample. The distribution of the average abnormal returns (AARt) in the estimation window is important, because if the AARs are

not normally distributed, parametric tests’ validity can decrease (Brooks, 2002). The null hypothesis of this test assumes normality.

= ₊()

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Where, N is the number of observations, S is the skewness and K is the Kurtosis. The outcome is tested on a 5% significance level.

Parametric test

The most commonly known parametric test is the student t-test. Using the t-test, the significance of the AAR can be evaluated. However, the power of the t-test is very _t dependent of the distribution of the data. For the t-test to be optimal, the distribution must be normal. The t-test is used as follows (Raj and Forsyth, 2002):

t= AARt Sˆ(AARt) (6) (7)

∑

+ − = days days t t AAR period AAR 1 (8)

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The t-test, tests the null hypothesis that the AAR and the CAAR are zero. The test is two-sided, since the direction of the sign is not obvious yet. The outcomes are tested on a 1%, 5% and 10% significance level.

Non-parametric test

The t-test is parametric in nature, meaning that specific assumptions have been made about the distribution of abnormal returns. Alternative approaches are available which are non-parametric in nature. These approaches do not make any assumptions concerning the distribution of returns (MacKinlay, 1997). The two most common non-parametric tests for event studies are the sign test and the rank test. This study uses the rank test as the non-parametric test to use.

The rank test

In response to this possible shortcoming, Charles Corrado (1989) proposes a non-parametric rank test for abnormal performance in event studies. Compared with its parametric counterparts and with standard non-parametric tests, this rank test offers improved specification under the null hypothesis and more power under the alternative hypothesis of abnormal security-price performance. The simple rank test studied by Corrado (1989), is correctly specified no matter how skewed the cross-sectional distribution of excess returns. Also, the specification of the rank test is less affected by an event-date excess-returns variance increase than are the parametric tests (Corrado, 1989). The test is specified as follows:

! ="∑ # $%& () '" (11) (() = )_*" ∑_'".-". "∑ (_+'" ₊−*-" (12) Where N is the number of events, W is the event window and Kit is the rank of the

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Results

his section describes the main results of the research. For every part of the study, the Average Abnormal Return (AAR) and Cumulative Average Abnormal Return (CAAR) (long term and short term) will be discussed and evaluated using different tests. The results will be shown in tables and graphs. The AARs around the event date are discussed using the T-test statistic and the Corrado rank values. Furthermore, the CAARs are examined to see if there are any positive or negative long term effects which will be shown in a graph. The CAARs are also placed in different time frames around the event date and the will also be tested using the t-test.

Friendly vs. hostile acquirers

Hostile takeovers

First, the hostile takeover acquiring firms are discussed. Table VII shows the Average abnormal returns (AAR) for hostile takeover acquiring firms. The AAR on the event day is insignificantly negative for the T-value, but significant negative for the Corrado value. These results are in line with Raj et al (2002). They find that the decrease on the announcement day suggests that the market believes the bidder will overpay if the hostile approach proves successful. The results are also in line with the general perception that bidding firms shareholders lose and target firm shareholders win when an acquisition is made. However, the short term loss is being offset by a long term gain as we can see in figure III and IV (see appendix). Since the market and risk adjusted return model is used, figure III and IV show cumulative outperformance opposed to the market. The upward trend of the long term post acquisition gains is very clear and with an R² of 0,995 very strong. This is also consistent with the findings of Raj et al (2002) and Sandarsanam et al (2006) who also find long term gains to hostile bidding firm shareholders. Table VIII (page 26) shows the CAARs for different periods in the event window with the associated t-values. The results of theCAARs also show a long term gain. The days around the event

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window show no significant gains or losses. However, the long term CAAR (-10,+260) is significantly positive at a 1% level with a t-value of 8,47. The gain over a year accumulates to 11,61% more than the market.

Table VII

Average abnormal returns in the event window of hostile- and friendly takeover acquirers

This table shows the average abnormal returns around the announcement date, with the associated T-values and Corrado Rank values. *,** and ***, statistically significant at respectively 10%, 5% and 1%.

Event

date AAR T-value Corrado AAR T-value Corrado

Hostile takeover acquirers Friendly takeover acquirers

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Table VIII

Cumulative average abnormal returns for hostile- and friendly takeover acquirers This table shows the CAARs for different lengths of the event window. *,** and ***, statistically significant at respectively 10%, 5% and 1%.

Event Window CAAR T-value CAAR T-value

Hostile acquirers Friendly acquirers

-10,+260 0,1161 8,47 *** -0,1138 -10,84 *** -10,+10 0,0162 1,18 0,0135 1,28 -5,+5 -2+2 -1+1 -1,0 0,0113 0,0100 0,0026 -0,0007 0,83 0,73 0,19 -0,05 0,0146 0,0124 0,0098 0,0041 1,39 1,18 0,93 0,39 0,+1 -0,0001 -0,01 0,0072 0,69 Friendly takeovers

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merger returns. These findings are significant at 1% level with a t-value of -10,84. Table VIII also shows that all the CAARs around the event day are positive.

Hostile vs. friendly takeovers

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Table IX

Average abnormal returns around the announcement date of hostile takeover acquirers versus friendly takeover acquirers

This table shows the average abnormal returns around the announcement date, with the associated T-values and Corrado Rank values. *,** and ***, statistically significant at respectively 10%, 5% and 1%.

Event date AAR T-value Corrado

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Table X

Cumulative average abnormal returns for hostile takeover acquirers versus friendly takeover acquirers

This table shows the CAARs for different lengths of the event window. The CAAR is obtained by subtracting the hostile takeovers AAR of the Friendly takeover AAR. Then, the results are cumulated the get the CAARs. *,** and ***, statistically significant at respectively 10%, 5% and 1%.

Event Window CAAR T-value

-10,+260 0.2299 11.55 *** -10,+10 0.0027 0.14 -5,+5 -0.0033 -0.17 -2+2 -0.0024 -0.12 -1+1 -0.0072 -0.36 -1,0 -0.0048 -0.24 0,+1 -0.0074 -0.37 Disciplinary hypothesis

The disciplinary hypothesis will be tested using the share price performance of the target company prior to the takeover and the earnings per share (EPS) before the takeover. Bad share price performance could indicate bad governance and could therefore support the disciplinary hypothesis. The same holds for the EPS of the target company.

Share price performance

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window. The long-term CAAR (-270,0) represents the share price performance of the year prior to the takeover. All the CAARs of the targets are significant at a 1% level when the event day is included in the calculation. This is obvious since the 6% price jump on the event day is also incorporated. Therefore, the event day is excluded from the calculation. When the long term CAAR without the event day (-270,-1) is examined. The return is still significantly positive at a 1% level with a t-value of 2,33 and an outperformance over the market of 5,70%. This would imply that target companies do not underperform the market and therefore that underperformance is not a reason for hostile takeovers. These findings are supported by the study of Franks et al (1996) who concluded that hostile takeovers are not motivated by poor past performance of target companies. They found that target companies seem to be average performers in comparison to other quoted companies. This study even concludes that target companies even perform better than the market and therefore other companies. However, these findings contradict the findings of Martin et al (1991) who found that the firms that were taken over were significantly under-performing other firms in their industry as well as other target firms. Furthermore, Cosh et al (2001) also concluded that prior to takeover, targets in hostile takeovers experience significantly negative share returns.

Table XI

Average abnormal returns before the announcement date of hostile takeover targets This table shows the average abnormal returns around the announcement date, with the associated T-values and Corrado Rank values. *,** and ***, statistically significant at respectively 10%, 5% and 1%.

Event date AAR T-value Corrado

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Table XII

Cumulative average abnormal returns for hostile targets

This table shows the CAARs for different lengths of the event window. *,** and ***, statistically significant at respectively 10%, 5% and 1%.

Event Window CAAR T-value

-270,0 0,1248 5,10 * -100,0 0,0952 3,93 * -50,0 0,0855 3,50 * -20,0 -10,0 -5,0 -2,0 0,0602 0,0630 0,0570 0,0672 2,46 2,58 2,33 2,75 * * * * -1,0 0,0698 2,85 * -270,-1 0.0570 2.33 * -100,-1 0.0274 1.12 -50,-1 0.0177 0.73 -20,-1 -0.0076 -0.31 -10,-1 -0.0048 -0.20 -5,-1 -0.0108 -0.44 -2,-1 -0.0006 -0.02 Earnings performance

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try to capture synergy advantages and ad the result of the hostile target directly to the operating income of the firm. Friendly acquirers, however, have to bring the target firm operations in line with their own operations and try to create synergies in the long term. The costs of this operation are directly added to the operating income and therefore the income growth of friendly acquiring firms declines.

Table XIII

Growth in net income before extraordinary items

This table shows the NIBEI growth for hostile and friendly acquirers and for hostile targets. Hostile targets do not have any percentage in period +1, since this is the period after the takeover. Same holds for hostile and friendly acquirers who do have period +1 income, but this paper takes income only two periods before the takeover to compare the period +1 income with.

Period Hostile targets Hostile acquirers Friendly acquirers

+1 --- 31.43% 14.90%

-1 15.16% 20.24% 29.61%

-2 4.60% 23.34% 20.92%

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Conclusion and recommendations

his section gives the main conclusions of the hypotheses and thereby will answer the main research question. This section will end with the limitations of the research and the recommendations for further research.

Conclusions

This paper researched the difference between returns to hostile bidding firm shareholders and friendly bidding firm shareholders as well as the disciplinary hypothesis. The paper used the event study methodology in trying to explain the differences between returns and to establish if the disciplinary hypothesis is true. The samples used, consists of 47 hostile and friendly acquirers and 24 hostile targets in the period between 1996 and 2007. Using these samples, this study tried to answer the main research question:

“Are hostile takeovers more profitable then friendly takeovers and is the main reason for hostile takeovers is the disciplinary effect”

To answer this question, the different hypotheses are tested.

The first hypothesis, that hostile takeovers generate higher abnormal returns on the announcement date than friendly takeovers can be rejected. It is shown that the friendly takeovers experience slightly better returns on the announcement date. The returns for friendly takeover were insignificantly positive and the results for hostile takeovers were insignificantly negative. Since none of these results are significant, no real conclusion can be made.

The second hypothesis, that in the long term (1 year), hostile takeovers generate higher abnormal returns than friendly takeovers can be accepted. The results clearly show that in the long run friendly bidding firm shareholders lose and hostile bidding firm shareholders win in the long run. These results are all statistically significant. This could be the case because the friendly takeover acquiring firms do not realize the potential synergies of the takeover. Hostile acquiring firms, however, manage to profit from the takeover, because they do not strive for synergy, but they just discipline the management of the target firm

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by setting higher goals or just fire them. Either way, it can be seen that hostile takeovers ad value to the shareholders and friendly takeovers destroy value to the shareholders. The third hypothesis, that disciplinary takeovers are not the main reason of the hostile takeovers can not quite be accepted. Although the share price performance of the hostile targets is better than the market, the income of the hostile targets is more in line with disciplinary hypothesis. Income growth is significantly less than income growth of acquiring firms. The rise in share price the year before the takeover could also indicate that, due to income that is not realized, the market anticipates a takeover and therefore the share price rises.

The hypotheses make it possible to answer the research question. It is shown that hostile takeovers are more profitable than friendly takeovers. Friendly takeover perform slightly better on the announcement day itself, but in the long run hostile takeovers clearly perform better. These results are in line with the studies of Raj et al (2002), Sandarsanam et al (2006), Agrawal et al (1992), Goergen et al (2002) and Huang et al (1987). Furthermore, this paper finds small evidence that supports the disciplinary hypothesis. These findings are more or less in line with the findings of Martin and McConnell (1991), Cosh et al (2001) and Raj and Forsyth (2002)

Limitations and recommendations

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References

Agrawal, A., J.F. Jaffe, G.N. Mandelker (1992), ‘The Post-Merger Performance of Acquiring Firms: A Re-examination of an Anomoly’, Journal of Finance, Vol. 47, No. 4, pp. 1605-1620

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Appendix

Long term CAAR for Hostile Acquirers (

Long term CAAR Hostile Acquirers ( -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 0.12 -1 2 9 -1 0 9 -8 9 -6 9 -4 9 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 -1 0 ₁0 ₃0 Figure III

Long term CAAR for Hostile Acquirers (-130,+260)

Figure IV

Long term CAAR Hostile Acquirers (-10,+260)

-4 9 -2 9 _-9 ₁1 ₃1 ₅1 ₇1 ₉1 1 1 1 1 3 1 1 5 1

CAAR Linear (CAAR)

5 0 ₇0 ₉0 1 1 0 1 3 0 1 5 0 1 7 0

CAAR Linear (CAAR)

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Long term CAAR for Friendly Takeovers (

Long term CAAR for Friendly Takeovers ( -0.14 -0.12 -0.10 -0.08 -0.06 -0.04 -0.02 0.00 0.02 0.04 -1 2 9 -1 1 6 -1 0 3 -9 0 -7 7 -6 4 -5 1 -0.14 -0.12 -0.10 -0.08 -0.06 -0.04 -0.02 0.00 0.02 0.04 -1 0 _-1 8 1 7 2 6 3 5 4 4 Figure V

Long term CAAR for Friendly Takeovers (-129, +260)

Figure VI

Long term CAAR for Friendly Takeovers (-10,+260)

-5 1 -3 8 -2 5 -1 2 1 ₁4 ₂7 ₄0 ₅3 ₆6 ₇9 ₉2 1 0 5 1 1 8 1 3 1 1 4 4 1 5 7

CAAR Linear (CAAR)

4 4 5 3 6 2 7 1 8 0 8 9 9 8 1 0 7 1 1 6 1 2 5 1 3 4 1 4 3 1 5 2 1 6 1 1 7 0 1 7 9 1 8 8 1 9 7

CAAR Linear (CAAR)

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Long term CAAR for Hostile vs. Friendly Takeovers (

Long term CAAR of Hostile Takeovers and Friendly Takeovers ( -0.100 -0.050 0.000 0.050 0.100 0.150 0.200 0.250 1 ₁4 ₂7 ₄0 ₅3 ₆6 ₇9

CAAR hos v.s. friend

-0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 -1 0 _-1 8 1 7 ₂6 ₃5 ₄4 Figure VII

Long term CAAR for Hostile vs. Friendly Takeovers (-10,+260)

Figure VIII

Long term CAAR of Hostile Takeovers and Friendly Takeovers (

7 9 ₉2 1 0 5 1 1 8 1 3 1 1 4 4 1 5 7 1 7 0 1 8 3 1 9 6 2 0 9 2 2 2 2 3 5 2 4 8 2 6 1 2 7 4 2 8 7

CAAR hos v.s. friend Linear (CAAR hos v.s. friend)

4 4 ₅3 ₆2 ₇1 ₈0 ₈9 ₉8 1 0 7 1 1 6 1 2 5 1 3 4 1 4 3 1 5 2 1 6 1 1 7 0 1 7 9 1 8 8 1 9 7

CAAR hostile CAAR Friendly

10,+260)

Long term CAAR of Hostile Takeovers and Friendly Takeovers (-10,+260) y = 0.000x - 0.047 R² = 0.789 2 8 7 3 0 0 3 1 3 3 2 6 3 3 9 3 5 2 3 6 5 3 7 8

Linear (CAAR hos v.s. friend)

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Short term CAAR of target co

Long term CAAR of target companies ( -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% -10 -9 -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% -2 7 0 -2 6 1 -2 5 2 -2 4 3 -2 3 4 -2 2 5 -2 1 6 Figure IX

Short term CAAR of target companies (-10,0)

Figure X

Long term CAAR of target companies (-270,0)

-8 -7 -6 -5 -4 -3 CAAR -2 1 6 -2 0 7 -1 9 8 -1 8 9 -1 8 0 -1 7 1 -1 6 2 -1 5 3 -1 4 4 -1 3 5 -1 2 6 -1 1 7 -1 0 8 -9 9 -9 0 -8 1 -7 2

CAAR Linear (CAAR)

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Midterm CAAR of target companies (

Long term CAAR target companies ( -2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% -1 1 0 -1 0 6 -1 0 2 -9 8 -9 4 -9 0 -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00% -2 6 9 -2 6 0 -2 5 1 -2 4 2 -2 3 3 -2 2 4 -2 1 5 Figure XI

Midterm CAAR of target companies (-110,0)

Figure XII

Long term CAAR target companies (-270,-1)

-9 0 -8 6 -8 2 -7 8 -7 4 -7 0 -6 6 -6 2 -5 8 -5 4 -5 0 -4 6 -4 2 -3 8 -3 4 -3 0

CAAR Linear (CAAR)

-2 1 5 -2 0 6 -1 9 7 -1 8 8 -1 7 9 -1 7 0 -1 6 1 -1 5 2 -1 4 3 -1 3 4 -1 2 5 -1 1 6 -1 0 7 -9 8 -8 9 -8 0 -7 1

CAAR Linear (CAAR)

Hostile Takeovers