Friendly Takeovers in the UK: An Agency Analysis

Abstract

The paper analyses the corporate governance mechanisms of a sample of companies that have been acquired by friendly take-over and those of a matching control sample that have not. It also uses a holdout sample to assess the model's ability to correctly classify take-over candidates. The results show that friendly targets have lower Q ratios and are therefore poor performers. We also find that there are significant governance differences between the friendly take-over targets and the control sample. Friendly targets are more likely to have the same person acting as CEO and chair, have a higher proportion of new outside directors (those that have been on the board for less than four years) and have larger institutional shareholdings. The results suggest that distinguishing between friendly and hostile mergers may not be the most useful way of analysing merger behaviour given that friendly targets exhibit a number of characteristics consistent with the disciplinary aspects of the market for corporate control. The inclusion of governance characteristics also enables the model to differentiate between target and non-target companies when predicting acquisition probability. Using a holdout sample, the model correctly classified 57% of target companies.