Organization Theory and the Market for Corporate Control: A Dynamic Analysis of the Characteristics of Large Takeover Targets, 1980-1990
Davis, Gerald F., Stout, Suzanne K., Administrative Science Quarterly
banks or other firms had no such effect. Having an executive of a large bank on the board of directors also failed to save firms from takeover.(4) These results fail to support the predictions of bank control theory; moreover, they suggest that commercial banks are not particularly effective either at preventing managerial discretion or at protecting from takeover the firms to which they are connected. Thus, there is little evidence that a regime of more active bank participation in corporate governance would yield substantial benefits, contrary to the claims of recent commentators (e.g., Thurow, 1992).
Firms that were well connected in the interlock network were Corporate takeovers became perhaps the most significant events on the organizational landscape during the 1980s. Due to a confluence of factors--including the availability of large supplies of debt financing, innovations in financial instruments, and a climate of relaxed antitrust enforcement--top managers of large corporations previously thought invulnerable to unwanted takeovers abruptly faced a challenge to their control unlike any in the postwar era. Thus, between 1980 and 1990, 144 members of the 1980 Fortune 500 (29 percent) were subject to at least one takeover or buyout attempt. While most of these attempts (77) were hostile--publicly resisted by management--the vast majority ultimately led to a change in control, including 59 of the hostile bids and 125 bids overall, By decade's end, due to mergers and takeovers, roughly one-third of the largest industrial corporations in the United States no longer existed as independent organizations, indicating a degree of tumult at the top unparalleled in recent times (Faltermeyer, 1991).
Despite the importance of this trend, relatively little research on takeovers has appeared in the organization theory literature, and the relevance of the market for corporate control for theories about the dynamics of change in organizational populations has gone largely unrecognized. Organization theory, informed by a biotic evolutionary metaphor of organizations, has focused primarily on adaptation--internally generated organizational change--or selection--the death of organizations that fail to adapt (Aldrich and Pfeffer, 1976). Takeovers do not readily map onto either of these abstract notions. Takeovers are not internally generated, yet acquired firms typically undergo substantial organizational change under their new ownership. While death through business failure is not unheard-of among the largest corporations, it is exceptionally rare--several Fortune 500 firms sought protection through bankruptcy during the 1980s, but fewer than 1 percent of this population ultimately failed--while takeovers are quite common. Moreover, takeover targets almost always remain going concerns after the acquisition, operating in the same industry (or industries), with most of the same employees (Bhagat, Shleifer, and Vishny, 1990). Thus, while takeovers contain elements of both adaptation and selection, they do not easily fit either of these categories.
We argue that the operations of financial markets provided a potent motor of organizational change in the 1980s that challenges the metaphors of adaptation and selection that have dominated organization theory. Researchers on organizations and environments have catalogued the adaptive strategies that organizations can use to reduce uncertainty and increase autonomy (e.g., Thompson, 1967; Pfeffer and Salancik, 1978). Yet these theories are implicitly premised on a conception of the large corporation that takes the managerial revolution as the status quo: Stockholders are dispersed and effectively powerless, large firms are immune from takeover, and thus the largest corporations are run by a self-perpetuating class of professional managers who seek growth and greater environmental certainty with little constraint from shareholders (cf. Meyer, 1991). But as Herman and Lowenstein (1988: 215) pointed out, "The former stability of corporate control and irrelevance of shareholder ownership and voting rights to corporate power has been badly shaken and weakened" due to the construction of a takeover market for the largest corporations. …