Strong Managers, Weak Owners: The Political Roots of American Corporate Finance

By Mark J. Roe | Go to book overview

CHAPTER 10
Takeovers

ON THE EVE OF THE 1980S

The United States entered the 1980s with ownership of the large public firm fragmented, making managers freer than they otherwise would have been from financial influence. Institutions with big blocks might influence managers; big blockholders might also stymie takeovers. Scattered ownership in small blocks was a benefit and a curse for managers in the 1980s: although it freed them from day-to-day institutional influence, it made takeovers possible; institutions with small blocks were usually thought to tender their stock in the 1980s takeover wars.

A raider would have had trouble mounting a takeover if two or three financial institutions controlled the vote of large blocks of stock in industrial companies (as they do in Germany), or if cross-ownership of the largest industrial companies and the largest financial institutions were common (as it is in Japan). Takeovers coalesce ownership structures. If ownership were already coalesced, takeovers could not readily occur.

Thus takeovers did not originate solely in the changing financial technologies of the 1980s, but were rooted in the American political past of financial fragmentation, stemming from the federal fragmentation of banking, the Armstrong-induced passivity of the insurers, the partial sterilization of mutual funds by tax law and the 1940 Act, and the structural control managers have of private pensions. Do all this and a nation will have fragmented institutional owners unwilling or unable to directly deal with managers in the boardroom. History thus set the stage for takeovers. That is the first political claim I make for takeovers.

This leads into the second political claim. Takeovers are done with dollar votes to buy stock. But ballot box votes elect the politicians who make takeover laws. State antitakeover laws, which by the early 1990s were in place in more than forty states, raise the cost of a hostile takeover. Some responded to distortions favoring raiders; distortions favoring incumbents went uncorrected, or were increased. The laws were the response of local politicians to local business leaders, to employees, and to public opinion. Tactical success in a takeover need not make for political success. True, views of the “merits”—are takeovers functional or not?—affected legislators. But other

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