The Power of Takeover Defenses

Abstract

We investigate the effects of modern takeover defenses. Following the development of the poison pill, U.S. boards’ ability to block an offer that shareholders view as attractive depends on whether the board is protected by an “effective” staggered board (ESB), which prevents shareholders from replacing the full board in a single annual meeting. We test the prediction that the presence of an ESB has an effect on bid outcomes and shareholder returns using a new database of all hostile takeover bids for U.S. targets during the ten-year period 1995-2004 (n=161). We find that an ESB substantially increases the odds that a takeover target will remain independent. Other variables commonly thought to influence the outcomes of bids – such as prebid poison pills, the presence of a majority of independent directors on the target board, and target CEO characteristics – appear to have a much less significant effect than the presence of an ESB. We also find that targets that remain independent achieve, on average, significantly lower returns than acquired targets, and we find no evidence that ESBs provide countervailing benefits in the form of higher premiums for targets that are acquired. Putting these findings together, we estimate that having an ESB reduces returns to target shareholders by more than 20% in the five years after the bid is launched.

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