Corporate takeovers reached new levels of hostility during the 1980s. This heightened bellicosity was accompanied by many innovations in the art of corporate takeovers. Although hostile takeover tactics advanced, the methods of corporate defense were initially slower to develop. As a result of the increased application of financial resources by threatened corporations, however, antitakeover defenses became quite elaborate and more difficult to penetrate. By the end of the 1980s, the art of antitakeover defenses became very sophisticated. Major investment banks organized teams of defense specialists who worked with managements of larger corporations to erect formidable defenses that might counter the increasingly aggressive raiders of the fourth merger wave. After installing the various defenses, teams of investment bankers, along with their law firm counterparts, stood ready to be dispatched in the heat of battle to advise the target's management on the proper actions to take to thwart the bidder. By the 1990s approximately 85% of large U.S. corporations had in place some form of antitakeover defense.1
The array of antitakeover defenses can be divided into two categories: preventative and active measures. Preventative measures are designed to reduce the likelihood of a financially successful hostile takeover, whereas active measures are employed after a hostile bid has been attempted.
This chapter describes the more frequently used antitakeover defenses. The impact of these measures on shareholder wealth, a highly controversial topic, is explored in detail. Opponents of these measures contend that they entrench management and reduce the value of stockholders' investment. They see the activities of raiders as an element that seeks to keep management “honest.” They contend that managers who feel threatened by raiders will manage the firm more effectively, which will, in turn, result in higher stock values. Proponents of the use of antitakeover defenses argue, however, that these measures prevent the actions of the hostile raiders who have no long-term interest in the value of the corporation but merely are speculators seeking to extract a short-term gain while sacrificing the future of the company that may have taken decades to build. Thus, proponents are not reluctant to take actions that will reduce the rights of such short-term shareholders because they believe that they are not equal, in their eyes, to long-term shareholders and other stakeholders, such as employees and local communities. The evidence on shareholder wealth effects does not, however, provide a consensus, leaving the issue somewhat unresolved. Some studies purport clear adverse shareholder wealth effects, whereas others
1. Marcia Parker, “Companies Not Ringed With Defensive Armor,” Pensions and Investments,
vol. 18, no. 20 (September 1990), p. 21.