Super Hostile Takeovers

For a brief period in the late ’50s, until the mid-’60s, when modern hostile takeover techniques were perfected, we had a pretty much unregulated market for corporate control. Shareholders received on average 40% over the pre-bid price for their shares. But… 1968 … Williams Act … made it vastly more expensive for outsiders to mount successful tender offers. The highly profitable element of surprise was removed entirely.

The even stronger inhibition on takeovers resulted from actions taken by state legislatures and state courts in the ’80s. The number of hostile tender offers dropped precipitously and with it the most effective device for policing top managers of large, publicly held companies. … now, with the legal power to shift control in the hands of the incumbent [managers], they, rather than shareholders, will receive any premium paid for control. … It should come as no surprise then that, as hostile takeovers declined to 4% from 14% of all mergers, executive compensation started a steep climb. (more)

As this quote shows, current laws make it crazy hard to buy public firms, which has the effect of greatly entrenching CEO power and raising their compensation. Like blackmail laws, this is another way in which law goes out of its way to favor powerful elites. Law pretends to dislike and oppose elite dominance, but key details show otherwise.

Even during U.S. historical period when takeovers were easiest, still “shareholders received on average 40% over the pre-bid price for their shares.” That means those trying to takeover in essence faced a 40% tax; no point in taking over a firm if you can’t make it worth at least this much more. So this most effective device for policing top management would be even more effective if we could cut this tax, so takeovers could help in more cases.

The key problem is that when a takeover attempt starts to buy up lots of stock in a firm, people start to notice and then bid up their prices, expecting that a takeover will improve the value of the firm. Can we fix this problem?

Yes, consider that when the government wants to buy a bunch of land properties to build a project like a road, it faces a similar problem, that after the first few purchases the other property owners will greatly raise their price, knowing that the government can’t do its project without all the needed properties. 

The standard solution to this problem is eminent domain, where the government forces them all to sell at some official “market price”. But, as I’ve discussed, a better solution is to use a Harberger tax, where each property owner must always declare a value for their property, a value which is used both to set their property tax, but also to be an always-available sales price for the property. These values will generally be reasonable, due to owners trying to avoid paying high taxes, allowing the government or any other party to quickly assemble large property bundles for any big project without needing any special powers.

We could use the same trick for stocks. Tax stock ownership, and require every stock owner to declare a value for their stock, a value used both to set their tax, and also available to takeover attempts as a sales price. Then a takeover could happen overnight, as 51% of the stock is suddenly purchased at its declared Harberger tax value.

Most speculators might want to declare a value just above the current stock price, and we’d make it easy for them to just declare a percent increment, like say “My value is always 10% over the current market price.” If most did that, a takeover might only face a 10% tax, instead of the 40% tax described above.

I gotta admit that cases like current policy discouraging hostile takeovers makes me despair of trying to introduce any more complex or less effective innovations. The case for allowing more hostile takeovers seems to me especially simple and strong. If even a change this valuable and simple can’t be done, what hope is there for other policy changes?

Added 3p: The tax seems to be about the same size today, but so the main extra problem now is allowing far fewer takeovers:

In large-sample studies, the winning offer premium typically averages approximately 40%–50% relative to the target price two calendar months before the initial bid announcement. (more)

Of course we should also make it easier for someone who owns 51% of stock to actually control the firm. So not using poison pills, staggered boards, supermajority voting rules, voting vs non voting stock, required prior notice of or plan to purchase, etc.