Enable Raiders!

A robust, properly functioning market for corporate control is vital to the performance of a free-enterprise economy with public corporations. … Shareholders face an array of collective-action problems that prevent them from coalescing to deal with bad management. … The market for corporate control is the only known antidote for all of these collective-action problems.

More here.  It is hard to exaggerate how very important this is – we’d be so much richer now if it it had long been easier for raiders to take over public firms.  We now put many inexcusable obstacles (listed below) before such raiders, including disclosure, super-majority, poison pill, and merging delay rules.  In fact,

Gains to target shareholders average 40–50 percent above the prices at which target firms’ shares traded immediately prior to the takeover. … [But on] returns to bidders, … studies have shown negligible gains.

So raiders have to wait until they can boost a firm’s profits by ~50% before it is worth trying a takeover!  Imagine our progress if raiders could instead win by improving a firm by only 5% (or 0.5%).  Raiders would replace overpaid and out-of-touch CEOs, the new guys would clean house in upper management, and that would induce better incentives and organization all the way down the line.  It seems to me a complete no-brainer to seek to eliminate all takeover obstacles, and to seek even more ways to encourage raiders.

Amazingly, the main anti argument here is that takeovers might hurt other “stakeholders” such as employees, the environment, or civic pride.  Apparently we must protect over-paid CEOs because they are our heroic public-spirited defenders of the little guy against greedy shareholders.  Where oh where would little folks be if not for protection from CEOs?

Oh, please!  CEOs?!  They are mainly protecting their own butts – other consequences are side effects.  You don’t want this protection racket any more than you want the mob “protecting” your small business.

Really, few policies are clearer big wins than this.  Maybe open immigration is a bigger net win, but low wage locals may lose, and civic culture could be at risk.  With raiders the only “downside” is the usual disruptions from faster innovation.  (New owners must follow the same anti-trust etc. regulations as before.)  In general, innovation requires new or at least changed organizations to displace old ones.

But disruption is the standard cost of growth; if growth is good, raiders are good.  If stronger unemployment insurance, or other ways to smooth disruption, is the price to removing raiding obstacles, I’m all in favor – the gains are so huge.

Details on those unfair obstacles:

A federal law enacted in 1968 requires firms and individuals that make public bids for the shares of publicly traded companies … to disclose information about themselves, their sources of financing, and their plans for other companies … Other share buyers bid up the price of the target company’s shares, giving a gain to the acquirer, who did all the costly research, only on his 5 percent of the shares. …  The statute requires any bidder to make the same disclosures within ten days of acquiring 5 percent of the shares of a public company, regardless of how those shares were acquired. …

“Shark repellant amendments,”… require shareholders to vote to approve outside acquisitions by large “supermajorities” of, say, 75 percent in order to complete an acquisition … Poison pills are rights freely distributed to target-company shareholders that give the shareholders the “right” to purchase shares in the target firm (or the bidding firm in case of a merger) at significant discounts in price when … someone’s or some firm’s accumulation of voting shares in the target above a specified threshold, such as 15 or 25 percent.  …

The biggest problem … is the state and federal laws that impede takeovers. … The Delaware statute prohibits a hostile acquirer from completing a takeover by merging with the target for at least three years after buying a controlling interest unless the bidder either obtains the approval of the target company’s board of directors or acquires more than 85 percent of the target’s stock.

HT Alex T.

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  • anon

    Many of these anti-takeover defenses are most likely supported by shareholders, as a means of improving their bargaining position against would-be raiders. So this may actually be a rather complex problem.

  • http://lesswrong.com/ Eliezer Yudkowsky

    Stronger unemployment insurance or something else that strengthens the bargaining position of employees? What ways are there to strengthen the negotiating position of labor versus management? It’s not that I disagree with the main article – it reminded me to add “enable stronger shareholder control and oversight” to my list of obvious easy big wins – but it does seem likely that empowered shareholders would negotiate even more viciously with employees than current management, and capture more of the gains from trade.

    • http://michaelkeenan.blogspot.com Michael Keenan

      What’s on your list of easy big wins?

      • michael vassar

        Agricultural reform is close to the top of mine, ending the drug war is probably the very top. That or separating medical care from employment.

      • http://michaelkeenan.blogspot.com Michael Keenan

        Thanks Michael Vassar for your answer, and I agree those are easy big wins. (By agricultural reform you mean ending subsidies, right? Are there other good reforms in that area to be aware of?)

  • http://www.johnson.cornell.edu/faculty/profiles/bl Robert Bloomfield

    I agree with the sentiment, but:

    1. I don’t think you can blame the low returns to corporate acquisition on the hurdles to takeover. Overconfidence and empire building induce managers to buy companies and lose money. Actually, I am surprised the paper says that bidders enjoy negligible gains–I thought they suffered statistically significant losses on average.

    2. Given the power management has in most companies, I wonder if a significant easing of control transfers might lead to some dubious transactions that benefit entrenched management (via buyouts and side deals), to the detriment of stockholders. I am not sure that would be worse than where we are now, but it is worth a second thought.

  • http://t-a-w.blogspot.com/ Tomasz Wegrzanowski

    Surely such regulations vary a lot by country and time, so if this effect was significant, we’d see a lot of performance differences here – and there doesn’t seem to be much evidence for it.

  • Stuart Armstrong

    Are other countries better at this than the US? Or do they all have equivalent “Shark repellant amendments”?

    • Hans

      The seminal papers for the effects of regulation on finance were written by La Port, Lopez-de-Silanes, Shleifer & Vishny (1998,1999,2000, …) often abbreviated to LLSV. They compared corporate laws, shareholder/creditor protection and enforcement in 49 different countries. They found that the extent of this “legal risk” has significant effects on stock market capitalisation, ownership concentration, etc. Most contemporary research is based on their data.

      They find that in common law systems (e.g. US and UK), shareholders and creditors are best protected, compared to French-civil law systems. Shareholder concentration is higher in civil law countries, and outsiders (such as minority shareholders) have a harder time to effect change.

      (I’m currently writing my master’s thesis on the effects of legal risk on the extent of syndication of LBOs in Europe.)

      • Stuart Armstrong

        Thanks!

  • http://hanson.gmu.edu Robin Hanson

    Eliezer, its not clear to me its a good idea to strengthen either side’s bargaining position – better to reduce lock-in to encourage a more competitive labor market.

    Robert, I can certainly blame the difference between raider returns and other shareholder returns during a raid on raider obstacles.

    Tomasz and Stuart, English-speaking nations, plus France and Spain, allow takeovers easiest.

    • http://www.johnson.cornell.edu/faculty/profiles/bl Robert Bloomfield

      Not sure I understand your response. Assume there are no frictions in the market for corporate control, and that market prices are efficient but that acquirers consistently overpay for control. Then there would be positive returns to sellers, and negative returns for buyers (which is my understanding of the data).

  • Matthew C.

    I strongly agree with your point — however — we could increase everyone’s wealth far more still by reducing the parasitism of the the market-sheltered sectors (education, health care, government) on the market-exposed sectors of the economy.

  • Ryan Vann

    The term “Raider” makes the whole enterprise seem so violent; perhaps we could come up with a more palatable one to push this agenda?

  • Bill

    Absolutely correct on this.

    You can trace the rise of executive compensation and arrogance and uncorrected mismanagement to the efforts in the mid 80’s to develop and perfect the poison pill and other devices.

    Shareholders will only benefit, but, this is also conditional on management not making special deals with the greenmail targeter; otherwise, we could be worse off if we lower some of these defenses.

    Everything needs to be thought through when you make a systemic change.

  • Bill

    I TOTALLY agree with position that shareholders do not have control, and must be given more control of their corportations, and that battles for corporate control, if controlled for greenmail problems, is a worthy pursuit.

    That is why I am puzzled, though, on a position that overrules precedent and gives corporations the right to directly campaign for candidates and do unlimited funding under the guise of corporate free speech.

    Was reading Brad de Long’s post today of another article, and here is something to consider on the issue of corporate shareholder control and last weeks SCOTUS decision:

    ‘When corporations use other people’s money to electioneer,’ as Kagan explained, ‘that is a harm not just to the shareholders themselves but a sort of a broader harm to the public,’ because it distorts the political process to inject large sums of individuals’ money in support of candidates whom they may well oppose.

    “Roberts sharply challenged this line of argument. ‘Isn’t it extraordinarily paternalistic,’ he asked, ‘for the government to take the position that shareholders are too stupid to keep track of what their corporations are doing and can’t sell their shares or object in the corporate context if they don’t like it? … ‘ “We the government have to protect you naive shareholders.” ‘

    • http://adequatelyreserved.wordpress.com bcg

      I assume you feel the same way about union dues, right?

      • Bill

        Sure, so long as there is no free riding.

        How do you feel about free riding?

      • http://adequatelyreserved.wordpress.com bcg

        If I have stronger opinions about abortion or gun control than I do my union benefits, and a candidate who doesn’t share my opinions about abortion or gun control tells me he will fight for my union, then how could free-riding have been avoided?

        This issue applies to stocks, as well – if I like both money and reputation gained from vocally supporting an issue, the effecting of which would cost me money, I much prefer being able to deny the power to negotiate between these two values by leaving agency to the corporation.

      • Bill

        Also, BCG, how about this as well: non-profit corporations compete with for profit corporations. Nonprofits are banned from any political activity. Nonprofit corporations (hospitals, HMOs) will be prohibited in competing for attention with their for profit counterparts. And, lest you say, give the non-profit the same voice, don’t forget you get a tax deduction for contributing to a non-profit. This will mean that wealthy individuals, in the non-profit campaign feature is eliminated, will be able to take a tax deduction for stuffing the pockets of politicians by assuming their campaign obiligations.

        Wonderful.

    • Bill

      BCG, remarkable logical inconsistency in your statement which may be more results oriented than logical.

      By free riding, I meant with respect to union contracts with employers representing employees.

      I have no problem with different voices being heard within unions, and have employees break in different camps to support a candidate. In fact, it would be good to have some union members who support, say, Republicans, organize within their union to have a subgroup, or to say, we don’t want the union to do anything on issues x, y or z. Would prefer a subgroup.

      Now, as to corporations, with foreign shareholders owning part of domestic corporations, I don’t see how this is even possible, unless you believe foreign investors should have power in domestic politics. Perhaps you do. As that is what you’re going to get. Just as the domestic sub of SAP or Vivendi or Toyota, or some Chinese Joint venture with a state owned entity and a domestic partner which forms a US incorporated sub.

    • Andrew

      What a remarkable quote from Justice Roberts, clearly introducing ideological considerations into his role as objective interpreter of the Constitution. Unless there is some secret clause in the Constitution that only the Chief Justice gets to know about saying “Congress shall make no law that is extraordinarily paternalistic.”

  • Sean C.

    People fear the Wall Street (movie) narrative where the raider buys a profitable business and kills it for a short term gain.

    Here’s a true version of the story.

    • http://hanson.gmu.edu Robin Hanson

      One could only kill a firm for short term gain if one had other fools who believed instead you were making the firm stronger. From your story:

      Investors who bought that debt are getting virtually nothing in the new deal.

      It only makes sense to prevent firm purchases for fear of bad management if you think new managers tend on average to be worse than old managers.

      • Sean C.

        Well, yes, the narrative I related implies exactly that. The caricature of the raider is not someone who wants to turn a business around and help it grow, but one who wants to make a quick buck and be on his way. Whether this caricature is correct or not, I don’t know. But this is the root of the fear that leads to these regulations.

        I will say, more concretely, that these leveraged buyouts almost always involve borrowing against the firm’s value. The capital raised through this borrowing goes to paying off the former shareholders, not towards building the business. So now the firm has this additional debt load with no growth spending to help service it. This just can’t be healthy, especially when repeated several times in the case of Simmons.

        The original article cites ‘Numerous studies’, so I can’t go look and see how those studies measured the long term health of the takeover targets.

      • http://hanson.gmu.edu Robin Hanson

        Isn’t that like saying we shouldn’t let people buy used cars, especially via loans, because they might smash it into a tree?

      • Sean C.

        In cases where a used car is unsafe to others, the government does discourage me from buying it with mandatory inspection programs and such.

        And this comes to the crux of the matter; who is likely to be impacted when my decision fails?

        Amazingly, the main anti argument here is that takeovers might hurt other “stakeholders” such as employees, the environment, or civic pride. Apparently we must protect over-paid CEOs because they are our heroic public-spirited defenders of the little guy against greedy shareholders.

        So when Simmons Mattress or Six Flags go under and people are put out of work, what do we tell them? They were victims of a market mistake that overvalued the company and allowed irresponsible borrowing? Banks are ready to lend me more money that I can responsibly pay off, and if I go borrow it and get into trouble, who’s fault is it? Mine or the silly bank?

        From the outside it looks like they were victims of company owners that weren’t interested in running a company to build a product and sell it to customers so much as getting as much cash as they could.

        I do agree though that the goal of preventing companies from bad managers is not precisely aligned with regulations that prevent takeovers.

      • Matthew Hammer

        It could very well be that raiders do take over companies to “make a quick buck and be on their way” and yet are still providing a valuable service.
        Given the obstacles to takeover, and the how much improvement must be available to make such an action profitable, it may be that raiders can only target improvements that are both simple and valuable. Taking over a badly managed conglomerate empire and selling off the parts piecemeal both fits the stereotype of a corporate raider and can provide huge gains as the smaller business subunits can operate much more efficiently (and are thus worth more) without the conglomerate’s overhead and bad management. The short term of the intervention also decreases the opportunity cost of the investment interest the raider could otherwise be making.

        Thus the short time horizon associated with the corporate raider is likely an artifact of the very obstacles Robin is decrying.

      • Sean C.

        It could very well be that raiders do take over companies to “make a quick buck and be on their way” and yet are still providing a valuable service.

        Maybe. I submit that an owner with short term interests is most often poorly aligned with the interests of employees and communities.

        Breaking up a conglomerate, like BCE divesting Nortel, can create value and make life better for everyone. However the New York Times article describes a more stark scenario. New owners bog the company down in debt and drive it into the ground.

      • http://hanson.gmu.edu Robin Hanson

        Sean, turns out used cars can be unsafe to others – cars can hit pedestrians as well as trees. Should we therefore prohibit sales of used cars because a sold car might hurt someone? Even though keeping the car with its original owner can lead to the same outcome?

      • Sean C.

        We can discuss the economics of used cars if you like, but just how off topic do you want to go? I think the analogy of used cars to companies is breaking down.

        But, to play along, I was referring specifically to the mechanical failures that used cars are more prone to than new ones. So governments require purchasers of used cars to get them inspected and maintain them to a minimum standard of safety. Working brakes, headlights and so on.

        You’re talking about the generic hazards that come from being responsible for a large amount of kinetic energy. And governments make us buy liability insurance for that.

        How about this idea; governments track owner’s histories of layoffs and bankruptcies, and raise their portion of FICA premiums accordingly? Just like drivers with lots of accidents pay higher premiums to cover the extra liability?

    • Tracy W

      The capital raised through this borrowing goes to paying off the former shareholders, not towards building the business. So now the firm has this additional debt load with no growth spending to help service it.

      Well, this scenario raises the obvious question of why the corporate raider would borrow money in order to pay off the former shareholders. Even assuming that the corporate raider has nicely protected themself via limited liability against all recourse in the event of the loans being repaid, raising the loans and paying for legal advice requires time that could be spent doing something else. So, unless we believe that corporate raiders are altruists who have for some reason decided to direct their altruism towards shareholders, presumably the corporate raider is expecting to get a profit from it themselves. Some options:
      1).They plan to sell the company in the short-term to someone who can probably manage it better than them or the former shareholders, but prefers not to look for companies directly. In other words, the corporate raider is providing a divsion-of-labour-service. Sounds good to me.
      2) They plan to run the company into the ground to extract short-term profits and then sell it to a bigger fool. Possible, but if there is an ample supply of fools out there with money to buy companies then the existing management could just take out massive loans and then sell their own company to the fool directly, so I don’t see any reason for banning corporate raiders specifically.
      3) The corporate raider thinks that the firm’s profitability can be improved by better management, even without any extra significant investment spending (we will allow some for changing the names on the front door and so forth). The corporate raider might be wrong about this, but then that’s true of any business venture.

      Am I missing something?

      • http://infiniteinjury.org Peter Gerdes

        The situation where the business is simply wasting resources.

        Corporations tend to have inertia and even when a particular line of work becomes a money losing proposition if they don’t have any better markets to move into they can continue to function while burning up money and using resources that could be better put to other uses (hence why they are losing money).

        For instance businesses where the family of the founder still has significant influence, e.g., the ceo is the grandson, or the executives have strong allegience to the company may be reluctant to face the facts that the enterprise is no longer worth continuing.

        In situations like this it can be profitable to take over the company and simply sell off the resources since the continued operation of the firm is a liability not an asset. However, this is still a beneficial service even if it may be very painful for the employees (the jobs will be lost eventually better to do so before they waste more resources).

        The only theory upon which it seems reasonable to be concerned about corporate raiders is one in which the market is deeply irrational and assigns unreasonably high values to the pieces of the company, e.g., like when during the tech boom such an irrational exuberance attached to internet companies that their stock would be boosted hugely but that same glow wasn’t always transferred to the valuations of the parent companies. However, I take this to be rare and as suggested when this is happening it doesn’t really matter if their are raiders or not things are going to go to pot.

  • MPS

    I wonder if the major obstacle to all kinds of rule changes to create more “free” (more “efficient”) markets is lack of well-functioning social security network.

    Imagine a fantasy world where unemployed people could sustain a lifestyle akin to when they were employed (or at least akin to the lifestyle of typical employed people) while they looked for work, while at the same time not decreasing their incentives to find new work, or work hard at their job. I realize this is a fantasy world that might not even be logically self-consistent.

    However, in such a world we do all kinds of “free market” things — like let US automakers fail, maybe even let banks fair, support free trade, and, as support corporate raiders as you now mention.

    Because it seems to me, as you say, we resist these things because we have an instinct against causing harm to people we view as innocent. The worker making car radios for example is seen as “innocent” of the decisions of automotive executives so we prop up care companies, even though that supports poor decision-making on the part of those executives, to spare the worker the “injustice” of losing her job.

    However in the fantasy world, we don’t care so much about this person losing her job, because it is not such a hardship. And thus we can let the market work in ways that might make it much more efficient.

    I personally think the “cost” (in form of taxes, say) to support such social nets would be well worth their value — however they carry another cost, in terms of reduced incentives, which is very hard to gauge and could very well be very destructive.

    I would personally like to see explored / developed something to the effect that if you’re willing to put in the time / labor, the govt will guarantee to pay you to work. This provides the financial support of the above-mentioned fantasy world social net, but because it demands labor, it both provides incentive for individuals to avoid this arrangement and also provides society with some product or service in return. The major obstacle (and of course it’s a huge one) is figuring out what labor to assign to such people and how much to pay, such that it does not interfere with the efficiency of the private market.

    • anon

      Imagine a fantasy world where unemployed people could sustain a lifestyle akin to when they were employed (or at least akin to the lifestyle of typical employed people) while they looked for work, while at the same time not decreasing their incentives to find new work, or work hard at their job.

      It’s not a fantasy world. It’s a combination of having a savings cushion and holding insurance against sectoral shifts which devalue one’s human capital. The latter could be accomplished by establishing prediction markets on sectoral wages and unemployment rates. Firm-specific human capital would still be uninsured, and would have to be compensated in a more direct way.

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  • jsalvatier

    Are there countries who do make hostile takeovers easy? If so, what is there experience?

  • http://entitledtoanopinion.wordpress.com TGGP

    Amazingly, the main anti argument here is that takeovers might hurt other “stakeholders” such as employees, the environment, or civic pride.
    I think the worst case of that is when the corporation in question is a government. The stimulus, for example, has been negatively correlated with the unemployment of a state (contra to Keynesian arguments of multipliers from slack) and furthermore gone toward sectors with the lowest unemployment, primarily those already paid by the government. Similarly, regarding civic pride, a lot of the complaints about Blackwater is simply the fact that they are “mercenaries”. Occasionally it is said that sweetheart contracts overpay them, but rarely is a side-by-side analysis given to show that uniformed military is better (even in terms of professionalism/civilian casualties). It’s like with the old argument against the draft: “I don’t want an army of mercenaries”.

  • http://www.rationalmechanisms.com richard silliker

    ARRR maties. legalizing theft we be no more pirates and subject to ‘anging. we’ze got the most gold so now we just hav’ta bury them t’ere ceo’s in it. One for you , one for me,,,, Two for you, one, two for me. three for you, one,two three for me.. Boz, does ya see how it works….. wheezzz richer. A tip of the hat to ROBBIN> there a little something in it for you my dear friend….

  • Bill

    Oh, and don’t forget the argument that management makes that if you protect us from a Raider, we won’t be looking at just short term quarterly performance, but long term performance.

    Comp levels go up even when performance tanks.

  • http://www.rationalmechanisms.com richard silliker

    The market for corporate control is the only known antidote for all of these collective-action problems

    I could agree with this, but only partly. Allow corporations that continue to bring novel products to the marketplace to continue. The raiders will stay away. My take is that the raiders only target the mediocre. These companies should be taken over by the government and run as utilities. The money given to the shareholders will be theirs to do what they want. If they want to invest in new ideas, go for it. We need people to invest in the frontier, to develop new products and services. The only form of cannibalism that would be acceptable is that of the people who have failed to make themselves redundant.

  • http://omniorthogonal.blogspot.com mtraven

    Ho hum, another wondeful libertarianoid idea undone by the real world. See here and here, particularly the story of the destruction of the Simmons Mattress company by private equity looters, at great cost to investors and employees alike.

    • http://hanson.gmu.edu Robin Hanson

      Yes, someone once bought a used car via a loan and then crashed it, so the bank never got its money back, so we should never allow anyone to buy used cars ever again.

    • ChrisA

      mtraven

      On investors (bond holders), the story of Simmons did not work out, but that’s investing for you, some do, some don’t. I hope you are not suggesting that investing should be risk free? Probably there is a story of gullibility here, which the PE guys took advantage of, but regulations will never eliminate that.

      On the employees, the layoffs at Simmons are not due to the take over. They are due to the fact that the business model didn’t work. The amount of debt carried by Simmons is irrelevant. Think about it, if a company could not service its debts and it goes into bankruptcy, the debt holders now own the company. But why would the debt holders shut down a viable business? If the underlying business is sound, the debt gets restructured and the employees carry on before. It doesn’t make sense for an owner to say, well my employees are cash flow positive, but I am going to lay them off to reduce my cash flow because I have high debts.

      • Douglas Knight

        Think about it, if a company could not service its debts and it goes into bankruptcy, the debt holders now own the company. But why would the debt holders shut down a viable business?

        Bankruptcy is a game of bilateral monopoly; it gets dragged out into a negative sum games of chicken. What you say is only true in the absence of transaction costs.

  • CraigM

    The issues here are complex. Rules to protect incumbent management are obviously bad and inefficient, but expecting shareholders to rein in rampant ineptitude is unrealistic – people face many constraints and generally have sufficiently diverse investments that the monitoring costs become prohibitive.

    Letting ideology overcome practicality in setting policy leads to a lot of problems – after all, in a decision Overcoming Bias endorsed (freeing corporations and unions from restraints on political spending), US Supreme Court Chief Justice John Roberts either conceded he was “stupid: or set an impossibly high bar to prove that he is not “stupid” – see http://blogs.reuters.com/felix-salmon/2010/01/24/how-justin-fox-almost-saved-american-democracy/

    The relevant excerpts from the blog are:
    “Roberts sharply challenged this line of argument. ‘Isn’t it extraordinarily paternalistic,’ he asked, ‘for the government to take the position that shareholders are too stupid to keep track of what their corporations are doing and can’t sell their shares or object in the corporate context if they don’t like it? … ‘ “We the government have to protect you naive shareholders”

    and:
    As long ago as 2003, Roberts owned no fewer than 46 different common stocks, on top of 31 different mutual funds, one ETF, and a REIT.

    If John Roberts would be able to demonstrate that he has even cursory knowledge of what all corporations he has an interest in are doing strategically and politically, or would be able to explain the management supervision criteria of the mutual funds he chooses to exercise discretion on his behalf, I would be amazed. In the absence of such a demonstration, we must be forced to conclude that the Chief Justice of the US Supreme Court is, by his own criteria and in his own words, “stupid”.

    When ideology trumps the practical (limited rationality, time constraints, information constraints), the results are usually pathetic.

    • http://infiniteinjury.org Peter Gerdes

      Your missing the point.

      The issue is that by protecting companies from raiders the ability of shareholders to regulate the behavior of management is REDUCED.

      In some sense raiders are providing a service to solve the collective action problem. The costs to coordination necessary to extract the value in the company which the managers are wasting (possibly to their own benefit) is too high for them to do the extraction themselves but they end up with more money by letting a raider come in and centralize ownership and achieve just that.

  • http://ahappinessexperiment.wordpress.com/ Bock

    “So raiders have to wait until they can boost a firm’s profits by ~50% before it is worth trying a takeover!”

    Wait. If the raiders believe they are really brilliant enough to boost a firm’s profits that much they are likely delusional. So maybe this is the problem: due to current regulations, corporate raiders in the US are almost always delusional. Hence the poor performance.

    • http://infiniteinjury.org Peter Gerdes

      What? Surely you don’t believe that disastrously bad CEOs can’t exist.

      It may not be very common but sometimes the people running the company just aren’t doing a good job.

  • Geoff B.

    “Numerous studies show that shareholders in firms that are the subject of takeovers enjoy significant profits.”

    CITATIONS PLEASE!!!!

    The few long term studies I’ve seen on raiding activity are mixed to negative.

    Anecdotally, I could LITERALLY name hundreds of raids/acquisitions by raiders, investment banks, hedge funds, SIV’s etc. that destroyed most to all net shareholder and vast corporate values with resultant losses in the trillions. Staggering debt loads, underfunded pensions, job destruction, inept management and failure are much more common result. My confidence level would be high that, at best, raiding is a near wash with an error of +/-10% Just a couple off the top of the head;

    TWA
    Revlon
    MCI/WorldCom
    Sears/Kmart
    Virtually anything done by Drexel Burnham Lambert

    • Douglas Knight

      If you’ve seen studies, please cite those.

      DBL is a fair sample. Did it really turn out so badly?

    • Rich Rostrom

      In how many of these cases did the shareholders who were bought out lose money?

      Greenmail is another category – management paying off a “raider” with stockholder assets to protect their own position.

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  • ChrisA

    While i agree with Robin that the take over laws are ludicrously favorable to incumbent management, I am not sure that overall economic efficiency suffers by that much. I think management, at least in large companies, are mostly sufficiently incentivised nowadays to minimize their rent seeking at a level sufficiently low enough not to hurt the overall performance of an economy. What keeps the rent seeking at a tolerable level is the very visible share price, which give very clear signals to people to apply Ostram type shame to managers who are obviously plundering or abusing their position.

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