The Performance of White-Knight Management
Carroll, Carolyn, Griffith, John M., Rudolph, Patricia M., Financial Management
In September 1987, the Tonka Corporation, a toy manufacturer, entered the control contest for Kenner Parker Toys as a "white knight" to save Kenner Parker from New World Entertainment Ltd. As a result of the bid, Tonka's shareholders lost $13.5 million in market value. Tonka's troubles, however, began long before 1987.
The story begins in 1979, the year Tonka appointed Stephen Shank as president and chief executive officer, and the first year the company had ever omitted its dividend. In 1980, Tonka sued Mego International to force it to sell its 19% stake in Tonka and to prevent it from acquiring more shares, a move that may not have been in its shareholders' best interests. In 1981, Tonka bought back 600,000 shares at $34.50 each.
Except for frequent announcements of earnings losses, all appeared to be quiet at Tonka from 1981 through 1983. But in February 1984, Tonka fired its chief financial officer for allegedly making an unauthorized and improper investment of company funds. In 1985, the SEC accused Tonka of failing to maintain adequate internal controls. Due to declines in its stock price, Tonka withdrew a proposed public offering of one million common shares. In 1986, Tonka's "Star Fairies" doll was declared a flop, and Hasbro Inc. sued the company for allegedly misappropriating a top-secret new toy. This same year, the board amended the corporation's bylaws and adopted antitakeover measures. In 1987, the year it acquired Kenner Parker, Tonka announced losses of $8 million.
Tonka's losses continued until Stephen Shank, who was CEO throughout this saga, arranged for Hasbro to acquire Tonka in 1991. Even with the highly visible, value-decreasing decision to acquire Kenner Parker, top management maintained control of the company. Shareholders continued to suffer losses while management continued to destroy value.
Is this scenario typical of white knights? Are white-knight managers inefficient?
Are these managers replaced when they make highly visible, value-decreasing acquisition decisions? This study addresses these questions.
In this paper, we place the white knight's decision to enter the control contest in a broader context. Is the white knight's bad decision to make a bid for the target part of a pattern of bad decisions, i.e., decisions that do not enhance shareholder value? If so, do shareholders react by replacing management?
In Section I, we examine prior studies of white knights and discuss the use of Tobin's q as a measure of managerial performance. We present the data and methodology in the second section. Section III compares the efficiency of white-knight management with that of hostile-bidder management. In Section IV, we compare the frequency of replacement of upper management. Section V summarizes the paper.
I. Previous Research
Several studies have assessed the impact of the white knight's bid on common stock returns. However, these studies focus on the reaction of the market to a single decision. In this paper, we are interested in both the short-run effect of management's decision to make a white-knight bid and the long-term cumulative effect of all decisions made by management. Thus, the second part of our literature review looks at Tobin's q as a method of measuring the long-term quality of management's decisions.
A. White-Knight Bidders
Earlier studies find that white-knight bidders earn negative abnormal returns around the announcement of their entry into the bidding contest. Two recent studies that look specifically at white knights, Banerjee and Owers (1992) and Niden (1993), find that white-knight bidders experience significant, negative abnormal returns, but hostile bidders have significant, positive abnormal returns. In contrast, Smiley and Stewart (1985) find that white knights experience no significant abnormal returns. However, they study a period (1972-78) before the takeover boom of the 1980s when the white-knight defensive tactic became more prominent. …