20.3 Recent Trends in TakeoverActivity

The volume of takeover activity reached record levels in the 1990s. However, the char-

acteristics of the 1990 takeovers were very different from the takeovers of the 1980s.

As we discuss below, in the 1990s, there were very few hostile takeovers and LBOs,

but the number and size of cross-border mergers increased substantially.

The Demise of Hostile Takeovers and LBOs in the 1990s

During the 1990s, the number of hostile takeovers and leveraged buyouts declined sub-

stantially. Andrade, Mitchell and Stafford (2001) report that over 14 percent of the bids

in the 1980s were hostile and about half of those were successful. In the 1990s, only

about 4 percent of the bids were hostile and about 1/3 of these hostile bids failed.

Holmstrom and Kaplan (2001) report that leveraged buyout activity, which was often

part of, or in response to, hostile offers, constituted close to 2 percent of stock market

value in the late 1980s, but was virtually nonexistent in the 1990s.

Holmstrom and Kaplan argued that hostile takeovers and LBOs largely disappeared

in the 1990s because, at least in the United States, the incentive problems that this chap-

ter and Chapters 18–19 discussed have diminished. This is probably due to a combi-

nation of an increase in the importance of institutional investors, a greater use of stock

options and other forms of incentive pay, and perhaps a change in corporate culture:

Maximizing shareholder value is now viewed as the appropriate objective of manage-

ment. Indeed, Holmstrom and Kaplan state that the Business Roundtable, which con-

sists of representatives from the major U.S. corporations, changed their position in

1997, stating

“the paramount duty of management and the board is to the shareholder and not to

...other stakeholders.”

An alternative explanation for the decline in hostile takeovers is the prevalence of

various anti-takeover defensive actions that managers implemented in the late 1980s.

While these defensive actions do not eliminate the possibility of hostile takeovers, they

clearly make them more difficult. Section 20.11 provides a detailed discussion of these

anti-takeover defenses.

Grinblatt1408Titman: Financial	V. Incentives, Information,	20. Mergers and	© The McGraw1408Hill
Markets and Corporate	and Corporate Control	Acquisitions	Companies, 2002
Strategy, Second Edition

698Part VIncentives, Information, and Corporate Control

Cross-Border Acquisitions

An important trend in the late 1990s was the increase in cross-border mergers. Accord-

ing to a J. P. Morgan study, U.S. purchases of foreign entities increased from $13.3 bil-

lion in 1991 to $138 billion in 2000. The same study showed that foreign purchases of

U.S. entities increased from $21 billion in 1991 to $360.8 billion in 2000. Most of these

acquisitions can be characterized as strategic acquisitions, often with firms in the same

industry, but from different countries, combining to increase international market share.

Two of the best-known examples of these mergers are the 1998 mergers of British

Petroleum and Amoco to form BPAmoco and of Daimler-Benz and Chrysler to form

DaimlerChrysler. Other more recent examples of multinationals formed through cross-

border mergers include the pharmaceutical firm, Pharmacia Corporation, formed in

2000 from the merger of Sweden’s Pharmacia and the U.S. based Upjohn and the 2000

merger between France’s Vivendi Universal SAand Canada’s Seagram to form a

multinational entertainment firm.