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Taking Advantage of the Kinder, Gentler Takeover

Hostile acquisitions may be largely a thing of the past, as they’ve been replaced with gentler—and more effective—M&A strategies.

(originally published by Booz & Company)

Bottom LineThe nature of large-scale acquisitions has changed in recent decades, from the hostile power plays of the 1970s and ’80s to the gentler mergers of the 2000s. Many deals are now initiated by firms positioning themselves as attractive targets for larger companies. 

Rumors continue to swirl about a megamerger that could see Sprint fork out as much as US$50 billion to acquire T-Mobile and fuse the third- and fourth-largest telecommunications carriers, respectively, in the United States. The speculation has investors salivating over the potential gains in market share and consumers contemplating what it might mean for their service plans. But some analysts have also raised concerns: Are deals like these a bad move for the companies’ innovation efforts, their shareholders, and the telecom industry as a whole?

If recent history is any indication, no. A new study debunks many of the beliefs surrounding takeovers that have become entrenched in the wake of the much-publicized “hostile” corporate raids of the 1970s and ’80s.

Since then, the deregulation of major industries—including airlines, financial services, telecommunications, railroads, and utilities—has led to several waves of high-profile mergers, including those of multinationals seeking to take advantage of the increasingly global marketplace. To study the effects of this perpetual corporate reshuffling, the author of this new study analyzed and compared more than 100 recently published studies on takeovers—both successful and failed—as well as examining the most comprehensive database on nearly 19,000 deals involving publicly traded companies from 1980 through 2012.

Put simply, what he found was that most takeovers aren’t particularly hostile anymore. During the past decade, the boards of firms being sold initiated deals almost as often as directors at bidding firms did. For example, the same author’s forthcoming analysis of more than 3,800 takeovers with SEC filings from 1996 through 2009 found that about 45 percent of deals were kicked off by the firm being sold. Perhaps recent regulations have strengthened firms’ ability to withstand takeover attempts to the extent that traditional roles have almost been reversed, the author writes, and “with bidders on the fence, sellers may have to go on the offence.”

The study also dispels another lingering concern from the Wall Street era—namely, that the specter of unwanted takeovers acts as a drag on creativity, preventing managers at targeted firms from implementing long-term corporate investments. In reality, most researchers have asserted that the synergies generated from melding two companies’ innovation capabilities provide the most value in acquisitions. As a result, looming takeovers appeared to stimulate R&D spending at up-and-coming companies , presumably because these smaller firms sought to showcase their ambitions and become targets themselves. Under a larger corporate umbrella following a restructuring, they can take advantage of more sophisticated development, distribution, and marketing capabilities.

Looming takeovers appeared to stimulate R&D spending at up-and-coming companies.

Overall, firms benefit most from mergers and acquisitions when they target companies up and down their supply chain, within their own industry, and in sectors that will enable them to differentiate their product offerings, the author found. Bidding firms also typically have an efficient management team in place to quickly turn around underperforming plants or other types of subsidiary businesses, and in general, proprietary information remains protected throughout the negotiations. This gradual enhancement of firms’ competitive advantage has withstood periodic regulatory obstacles, the author also notes, and has tended to speed up as those barriers have fallen. During waves of merger activity, excessively diversified firms are those most likely to be swallowed up, followed by companies under financial duress.

This Darwinian scenario benefits both rivals and shareholders. In contrast to the widely held argument—which has been cited frequently in opposition to the rumored Sprint–T-Mobile deal—that mergers have collusive, anti-competitive effects on an industry, most of the evidence suggests that competing firms “learn from the productive efficiency driving the merger, possibly putting some rivals in play for a later date,” the author writes.

The proven benefits to acquiring firms’ upstream suppliers and downstream customers further imply that takeovers typically promote efficiency throughout the wider economy.   Instead of a nefarious, monopolistic accumulation of power, the type frowned upon by regulatory agencies, megadeals appear to spawn more innovation and competition among similar firms.

Finally, the study found, mergers pay off. Acquirers’ gains have historically been downplayed, sometimes characterized as nonexistent once all the dust of corporate negotiating and restructuring has settled. But there is consistent evidence that many estimates of these gains failed to take into account what the value of the firm would have been had it not taken over a competitor. The failure to see a merger through to completion, once it has been proposed, often has deleterious effects on a company’s stock price and overall value. But when a bidding company can pull off such a bold move, especially in the face of public scrutiny, it reaps rewards that far outweigh the risk of falling short.

Source: Corporate Takeovers and Economic Efficiency, B. Espen Eckbo (Dartmouth College, European Corporate Governance Institute), Tuck School of Business Working Paper No. 2013–122, Oct. 15, 2013


Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

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