Chapter Six

Takeover Tactics
Patrick A. Gaughan
Mergers, Acquisitions, and Corporate Restructurings
John Wiley & Sons, 6th Edition, 2015
 Takeover Options
• Friendly Deal
• 2007 Enterprise acquires Vanguard (Alamo &
National) – both private firms
• 2008-2009 Pfizer agreed to acquire Wyeth
• Unsolicited “Friendly” Bid
• 2008 Microsoft bid for Yahoo
• Hostile Bid
• 2006 Oracle’s hostile takeover of Peoplesoft
 Fiduciary Out
• Even with a friendly agreement, the target’s
board is required to consider other offers
until the target’s shareholders render their
final approval
• Ramifications for bidders: they have to be
prepared to respond to a rival bidder
 Merger Negotiations
• No Shop Provisions – where bidder
requires target not to solicit bids after bidder
makes offer
• Bidder does not want to invest resources in deal
and create value for target only to lose deal to
another bidder
• Boards are usually allowed to respond to
unsolicited bids (if not they could be sued)
• Bidder may impose termination fee if original
bidder does not respond to new offers and
participate in an auction
 Termination Fees
• Fee that gets paid if the target ends up being
sold to someone else

• Wyeth (AHP) got $1.8 billion when Pfizer

outbid it for Warner Lambert
• Pfizer got Lipitor from this acquisition

• T Mobile after its deal with AT&T fell apart

• It got $4 billion
 Merger Negotiations (cont.)
• Go Shop Provisions – bidder makes offer
and then asks the target to go shop the
company
• Avoids any claims from dissatisfied
shareholders that the bidder’s offer was not
competitive or full market value
• Ripplewood Holdings made $14 per share offer
for Maytag
• Maytag used the go shop clause to ultimately
get a $21 per share deal with Whirlpool
• Ripplewood got $41 million in breakup fees
• Was a win-win both all parties
 Merger Negotiations (cont.)
• Go Shop Clauses – important for
management buyouts
• Help reassure investors that the board is getting
best deal
• They usually provide a 30-50 day solicitation
period
• Critics say this is not long enough
• Critics say it is just a way for boards to “get off
the hook”
• Breakup fees tend to be high when have go
shop provisions
 Example
• 2013 Michael Dell & Silver Lake’s bid for
Dell Computer
• Acquired Dell Computer at a 37% premium
• Got competing offers from Carl Icahn and
Blackstone Group
 Price Effects after Bid
• Acquirer’s stock price often falls
• If bidder withdraws bid then price often rises
• Target rises
• If bidder withdraws bid price often declines
 M&A Price Effects
PA PT

M&A t M&A t
Announcement Announcement

Acquirer Target
 Takeover Contest Process
Bid accepted,
no more bids

Initial
Bid rejected,
bid
no more bids
All bids
rejected

Additional
Initial bidder
bids
wins

Rival bidder
wins

Start of Multiple Bid End of Process

Takeover Process Process Begins
Toe Holds, Runups, and
Bid Jumps

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 Takeover Tactics
• Establishing a Toehold – may allow for less
expensive purchases of a target’s stock
➢may lower the average cost of the takeover
➢More shares may be purchased without paying the
takeover premium
➢may also give the bidder leverage with target
management
➢Types of Toeholds:
➢Short Term: Held < 6 months from offer date
➢Long Term: Held > 6 months from offer date

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 Toehold Frequency
• Betton Eckbo & Thornburn (2007) showed
a toehold frequency of 13%.
• Surprisingly: short-term toeholds had a
frequency of only 2%!!!!
 Toehold Costs
• Disclosure: have to file within 10 days of
acquiring 5%
• Cost Related to Possible Failed Bid:
• If the bid does not succeed the share price may
fall and the bidder may have to sell off the
toehold shares at a loss
• Disclosure Pursuant to Williams Act:
• This may weaken bidder’s position relative to other
bidders
• May Not Get Termination Fee: if target is sold
to other bidder – the entrenched managers may
react negative to toehold & consider it hostile
Toeholds Size Not as Big or as Frequently
Used as One Would Think
• Jennings and Mazzeo (1993) as well as Betton &
Eckbo (2000) both found out that the average
toehold was well below 5% reporting threshold
• Remember, the actual potential holding could be
much greater than 5%
• Could buy shares for 10 days after reaching 5%
before have to report actual holdings

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 Toeholds Result in Lower Premiums
• Betton & Eckbo (2000) showed that
toeholds resulted in lower tender offer
premiums
• So toeholds save money: How?
• A) Buying some stock without premium plus
• B) Offer itself is at a lower premium
• So bidders have an incentive to establish
toeholds but many choose no toehold or a
smaller one than they could
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Why Bidders Do Not Max Out Toeholds?
• Danger of being caught holding shares if the
bid is unsuccessful
• This is especially true of the deal is
unsuccessful due to management
entrenchment

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 Runup and Announcement Period Returns

Source: Sandra Betton, B. Espen Eckbo, and Karin Thornburn, “Corporate Takeovers” in Handbook of
Corporate Finance, 2008, vol. 2, (Amsterdam: North Holland), p. 367.
 Runup & Markup
• Premium = Runup + Markup
• Runup – is the stock price upward
movement prior to the announcement of a
bid
• This may reflect word leaking out and/or
market participants anticipating
• Markup = how much offer price is above
the price on announcement date (which
includes the runup)
 Hostile Bids
• Information Asymmetry –
• Bidder has to make offer without access to info
that they may have had with friendly deal
• Have to make bid using publicly available data
• Target in better position to access its worth than
bidder
• Bidder at a disadvantage

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Merger Arbitrage

All Rights Reserved by Dr. Patrick Gaughan

 Arbitrage & M&A
• Riskless Arbitrage: buying & selling the
same asset in different markets and different
prices
• Risk Arbitrage: buying shares in potential
or actual targets and possibly selling shares
in acquirers
• There are mutual funds; they just do M&A
arbitrage
• Arbitragers causes more shares to be
concentrated in large blocks
• This may make buying large blocks easier
 Merger Arbitrage
• Sometimes also referred to as “event-driven
arbitrage”
 M&A Price Effects
PA PT

M&A t M&A t
Announcement Announcement

Acquirer Target
 Risk Arbitrage Return
A simple equation of a risk arbitrager’s annualized return
(RAR) is shown:
RAR = GSS/I x (365/IP)
Where:
RAR = risk arbitrage return
GSS = gross stock spread
I = investment by arbitrager
IP = investment period (days between investment
and closing date)
 Gross Stock Spread

GSS = OP – MP
Where:
OP = offer price
MP = market price
 Risk Arbitrage Return (cont.)
• The gain on the spread between the
acquisition price and the arbitrager’s
purchase price is only one side of M&A
arbitrage
• The other side is the short sale
• Let’s do a more complete calculation
 Risk Arbitrage Return (cont.)
• Assume: Target trading at $19 Pt = 19
• Acquirer has been trading at $15 Pa = $15
• Acquirer offers 2 shares for one of target
• Premium = (2 X 15) = $30 - $19 = $11
(58%)
• Let’s assume rumors and announcement
drive up the target’s price to $24 before
arbitrager can buy
• Let’s assume target’s price weakens to $13
before can sell short
 Risk Arbitrage Return (cont.)
• Assume: a) arbitrager buys 100 Target @ $24
• B) arbitrager sells 200 shares of acquirer at $13
Profit Calculation of Trades
• Buy 100 Target @ $24 p/share ($2,400)
• Sell 200 Acquirer @ $13 $2,600
• Profit: $200
• If deal closes say 150 days, arbitrager receives 200
shares of acquirer which can be used to pay back
short sale
• (remember now own 100 target shares and when
company sold get 200 acquirer shares in
exchange)
 Risk Arbitrage Return (cont.)
• Let’s now calculate the annualized return

• $200/$2,400 X 365/150 = 20.2%

• Time to Closing:
• Notice: quicker deal gets done, higher
return
• Ex: 90 days:
• $200/$2,400 X 365/90 = 33.7%
• Ex: 270 days:
• $200/$2,400 X 365/270 = 11.3%
 Risk Arbitrage Return (cont.)
• Notice also that quicker arbitrager can buy
shares as close to the preannouncement
price the better
• Ex: buy the shares at $20 p/share
Profit Calculation of Trades
• Buy 100 Target @$20 p/share ($2,000)
• Sell 200 Acquirer @$13 $2,600
• Profit: $600
Sources of Risk in Risk Arbitrage
• That the Deal May be Canceled:
• Financing Environment May Change
• Private equity deals usually have a Financing
Availability Opt-Out Clause

• Sub-prime crisis of 2007

• May cause rates to rise so much bidder may find the
deal uneconomical
• Example: Cerberus Capital backed out of buyout of
United Rentals
• Banks were still willing to provide the debt capital
but at a higher rate
Sources of Arbitrage Risk: Deal Cancellation
• Regulatory Approval May Not Be Secured
• Example: Proposed 2006 $17 billion merger
between PSE&G (NJ largest utility) and Exelon
Corp (Chicago) could not get approval of NJ Board
of Utilities
• Regulators feared combined company would raises gas
and electric rates in NJ
• AT&T could not get antitrust approval for
acquisition of TMobile
• Material Adverse Change Clause May Be
Activated

• Bidder may contend that something important

changed at the target which enabled the bidder to
back out
 Arbitrage Research

• Dukes, Frohlich, and Ma (1992) –

arbitragers earned 220% returns for their
sample of 761 tender offers (1971-1985)
• Jindra and Walking (1999) found returns >
100% for their tender offer sample over
period 1971-1995

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Arbitrage & Bidder Downward Price
Reactions after Bid

• Arbitragers may play significant role in this

• They think that the market will react
negatively so they short sell the stock
• This by itself can cause the bidder’s stock
price to fall
• Can be self fulfilling prophesy
• Does research support this?
Arbitrage and Stock Price Movements

• Mitchell Pulvino and Stafford (2004)

• Analyzed 2,130 mergers: 1994-2000
• Found that half of the bidder’s downward price
pressures were caused by the short selling of
arbitragers

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Case Study: United Rentals Cancellation
• Nov 2007 -- Cerberus Capital: run by
Stephen Feinberg, refused to complete its
$4 billion buyout of United Rentals unless
URI agreed to a lower price
• The parties agreed to a reverse breakup fee
of $100 million
• This means if Cerberus backed out it would
have to pay URI $100 million
• Cerberus letter to URI says:
• “After giving the matter careful consideration” we
are “not prepared to proceed with the acquisition of
URI on the terms contemplated by the agreement.”
 Cerberus Capital Management’s Letter to United Rentals
November 14, 2007

United Rentals, Inc.

Five Greenwich Office Park
Greenwich, Connecticut 06831
Attention: Roger E. Schwed, General Counsel

Re: Agreement and Plan of Merger among RAM Holdings, Inc. ("Parent"), RAM Acquisition Corp.
("Merger Sub") and United Rentals, Inc. ("URI") dated as of July 22, 2007 (the "Agreement")

Dear Mr. Schwed:

We are writing in connection with the above-captioned Agreement. As you know, as part of the
negotiations of the Agreement and the ancillary documentation, the parties agreed that our maximum liability
in the event that we elected not to consummate the transaction would be payment of the ParentTermination Fee
(as defined in the Agreement) in the amount of $100 million. This aspect of the transaction is memorialized in,
among other places, Section 8.2(e) of the Agreement, the final sentence of which reads as follows:

"In no event, whether or not this Agreement has been terminated pursuant to any
provision hereof, shall Parent, Merger Sub, Guarantor or the Parent Related Entities,
either individually or in the aggregate, be subject to any liability in excess of the
Parent Termination Fee [$100] for any or all losses or damages relating to or arising
out of this Agreement or the transactions contemplated by this Agreement, including
breaches by Parent or Merger Sub of any representations, warranties, covenants or
agreements contained in this Agreement, and in no event shall the Company seek equitable
relief or seek to recover any money damages in excess of such amount from Parent,
Merger Sub, Guarantor or any Parent Related Party or any of their respective Representatives."
 In light of the foregoing, and after giving the matter careful consideration, this is to advise that
Parent and Merger Sub are not prepared to proceed with the acquisition of URI on the terms contemplated by the
Agreement.

Given this position and the rights and obligations of the parties under the Agreement and the
ancillary documentation, we see two paths forward. If URI is interested in exploring a transaction between our
companies on revised terms, we would be happy to engage in a constructive dialogue with you and
representatives of your choosing at your earliest convenience. We could be available to meet in person or
telephonically with URI and its representatives for this purpose immediately. In order to pursue this path, we
would need to reach resolution on revised terms within a matter of days.

If, however, you are not interested in pursuing such discussions, we are prepared to make
arrangements, subject to appropriate documentation, for the payment of the $100 million Parent Termination
Fee.

We look forward to your response.

Very truly yours,

RAM HOLDINGS, INC.
By: /s/ Steven F. Mayer
-------------------------------
Steven F. Mayer
President
 The Casual Pass
• Where a bidder may attempt a friendly overture
prior to initiating a hostile bid.
• Sometimes is done when bidder is unsure of the
target’s response
• May backfire as it gives advance warning to target.
• Management of target is often advised not to
discuss such deals with bidder so as that the bidder
may not misinterpret target’s intentions.

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 Hostile Merger Tactics

• Bear Hugs

• Tender Offers

• Proxy Fights

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Bear Hugs

All Rights Reserved by Dr. Patrick Gaughan

 Bear Hugs
• Bidder brings offer directly to the Target’s
Directors
• Carries threat that a hostile bid will be forthcoming
• Legal duties of directors: carefully and diligently
consider offer
➢ But, directors do not have legal duty to sell
corporation

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 Example of Bear Hug
• Jan 2014 Charter Communications sent a bear hug
letter to Time Warner’s Board Chairman

• 2007 Oracle sent a bear hug letter to BEA

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 Two Types of Bear Hugs
• Teddy Bear Hug – less threatening
• Does not include a price
• Not meant to be made public
• Regular Bear Hug
• Does include a price
• Is meant to be made public
Letter Sent By Charter Communications to Time Warner Cable Management

January 13, 2014

Time Warner Cable Inc.
60 Columbus Circle
New York, New York 10023
Attention: Robert D. Marcus
Chairman and Chief Executive Officer

Dear Rob:

I enjoyed spending time with you in December discussing our prior proposals and the challenges our
industry faces. As you know, I believe we have a significant opportunity to put our companies together
in a way that will create maximum, long-term value for shareholders and employees of both
companies. Our financing plan, which gives us the ability to deleverage during a period where our
operating plan has sufficient time to be implemented, is prudent. Our history of operating performance
is well understood, as are our tax assets.

As you know, Time Warner Cable quickly rejected our proposals in June and October, and refused to
engage until we met in December. I communicated a willingness to submit a revised proposal in the low
$130s, including a cash component of approximately $83. Following our meeting, you agreed to have our
CFOs meet to review the structure, financing, tax and cash flow aspects of a transaction, which we
understand was very helpful for Time Warner Cable. We believed Time Warner Cable and its Board of
Directors would recognize the significant value of this combination and genuinely engage. Instead, you
came back with a verbal offer at an unrealistic price expectation which ignores a full 39% premium
already reflected in Time Warner Cable's stock (as of last Friday), widespread shareholder endorsement
of a deal, and Time Warner Cable shareholders' approximately 45% ownership in the upside of the
proposed transaction.
Furthermore, your proposal to significantly increase the cash component of the price contradicts Time
Warner Cable's own public statements on debt leverage. The information provided to date has been
exclusively one-way, which further reinforces the point that there is no genuine interest from Time
Warner Cable management and Board of Directors to engage on this opportunity.

While we are preserving all options going forward, we remain open to real engagement. We would like to
engage with you to conclude an agreement for a business combination that is beneficial for your
shareholders and ours. We would be prepared to offer a cash/stock election mechanism that would allow
those shareholders who wish to participate in the benefits of a combination to do so, while others who
wish to cash out will be able to do so at a meaningful premium. The financing to complete this
transaction is fully negotiated, and we can be in a position to sign commitment letters in a matter of days.

This transaction is beneficial to Time Warner Cable shareholders who remain invested in the combined
company because they realize the value creation from cost reductions, faster organic growth, and
leveraged and tax advantaged returns. We also believe that the new combined company, through
potential future swaps and divestitures with other industry participants, can help rationalize the
geographic holdings of the industry into more efficient entities capable of providing better services and
products into a very competitive marketplace, thus generating higher returns for the combined company
and the industry at large.

We are fully prepared to finalize a deal on an extremely expedited basis. We believe that time is of the
essence to prepare our companies to meet the challenges of the industry, which is why we have decided to
announce the status of our discussions to date to both sets of shareholders.

With best regards,

/s/ Tom
Thomas M. Rutledge, President and Chief Executive Officer
 Oracle’s Bear Hug Letter to BEA
October 12, 2007
Board of Directors
BEA Systems, Inc.
2315 North First Street
San Jose, CA 95131

Dear Members of the Board of Directors:

As discussed with your management team, Oracle remains available to discuss and
complete a transaction quickly and efficiently.

We believe that it is important to clarify the sequence of activities that have transpired
over the past few days. Upon receipt of Bill Klein's letter dated October 11, I contacted
him to address any process concerns. Bill and I agreed on an accelerated process that
would be, by anyone's standard, "short in duration" and not "open-ended" and that
would permit BEA to not "divulge competitively sensitive information."
 Oracle’s Bear Hug Letter to BEA (cont.)
BEA's management agreed to meet this morning at 10:00am Pacific time to commence a
process intended to result in the execution of definitive agreements before the open of
business on Monday, October 15. Unfortunately, BEA cancelled the meeting late last night
and declined our invitations to reschedule. In my subsequent discussions with Bill earlier
today, I asked whether there was any process that BEA would prefer to follow to move
towards a friendly transaction and was told that BEA had no such process in mind.

We are available to proceed immediately with a process that would lead to a friendly
transaction. In the meantime, we remain committed to our proposed price of $17.00 per
share, provided that the BEA Board and management team do not institute any measures
which reduce the value of the company or shift value from BEA's shareholders to the
management team. Our proposed price is a substantial premium to an already-inflated stock
price that reflected speculation of the potential sale of BEA and represents a more than 40%
premium to BEA's stock price before the appearance of activist shareholders in mid-August
of this year.

Sincerely,
ORACLE CORPORATION
Charles Phillips
President
Tender Offers

All Rights Reserved by Dr. Patrick Gaughan

 Types of Tender Offers
• Two-Tiered Tender Offers – also called
Front End–Loaded Offers
• Courts have found them to be illegal
• Coercive – designed to thwart Williams Act
• Best price rule renders them ineffective
• Fair price provisions – in state laws also make it
ineffective.
• Fair price provisions in corporate charters also
make them ineffective

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Friendly then Unfriendly Bidding
• Step 1: Make an ostensibly friendly offer
• If not favorably received then say if do not
accept will go hostile
• Step 2: Do hostile tender offer
• Case study: EA’s 2008 bid for Take Two
• Friendly bid was rebuffed
• EA followed with a hostile tender offer
 Tender Offers in U.S., 1980-2013

250

200

150

100

50

0
80 83 86 89 92 95 98 01 04 07 10 13

Source: Mergerstat Review, 1991 and 2014

All Rights Reserved by Dr. Patrick Gaughan
 # of Tender Offers in Europe, 1985-2013

600

500

400

300

200

100
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Thomson Financial Securities Data Corp, January 20, 2014.
 Value of Tender Offers in Europe, 1985-2013

Tender Offers in Europe ($ Mil)

900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Thomson Financial Securities Data Corp, January 20, 2014.
# of Tender Offers in Europe (w/o UK), 1985-
2013

400

350

300

250
Number

200

150

100

50
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Thomson Financial Securities Data Corp, January 20, 2014.
 # of Tender Offers in Asia, 1985-2013
350

300

250
Number

200

150

100

50
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Thomson Financial Securities Data Corp, January 20, 2014.
 Value of Tender Offers in Asia, 1985-2013
Value of Tender Offers in Asia ($ Mil)
80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Thomson Financial Securities Data Corp, January 20, 2014.
 # of Tender Offers in Japan, 1991-2013
120

100

80
Number

60

40

20
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Thomson Financial Securities Data Corp, January 20, 2014.
 Value of Tender Offers in Japan, 1991-
2013
Tender Offers in Japan ($ Mil)
35,000

30,000

25,000

20,000

15,000

10,000

5,000

0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Thomson Financial Securities Data Corp, January 20, 2014.
 Are Bad Bidders More Likely to become Targets?

• Mitchell & Lehn

➢ Found returns to acquirers approximately 0
• But: a) Acquiring firms that become targets
more likely had negative returns around
the announcement date. The acquisition
tended to cause the stock price to fall and
they become targets.
b) For acquisitions that were subsequently
divested the stock price response was
negative around the announcement date.
For ones that were not divested: small not
statistically significantly positive effects.
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 Mitchell and Lehn (cont.)
• Their results and others show that short-
term stock market responses can be very
prescient
• Market’s initial response is often correct
• Tell us these short-term oriented studies
may be quite useful

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Tender Offer Premiums & Shareholder
Investment Horizons

• Longer-term investors may have greater

incentives to monitor the company
• Gaspar, Massa & Matos (2005) found that
shareholders who held their shares for an
average of < 4 months (so short term)
received 3% lower takeover premiums
• So companies that have more short-term
stockholders tended to get lower premiums
Tender Offer Premiums and Director
Independence

• Cotter, Shivdasani, and Zenner (1997)

found that companies which had a greater
percentage of independent directors
received higher tender offer premiums
Do Target CEOs Trade Premiums for
Power?
• Julie Wolf (2004) analyzed a sample of 53 mergers
of equals over the period 1991–99.
• She found that target shareholder returns were
negatively correlated to target management or
directors going to be on the combined company’s
board.
• When the merger agreement provided for target
management or directors to receive a directorship in
the combined company they may have been less
likely to negotiate for a higher premium for their
shareholders.
• Want the job more than money for shareholders
 Glamour vs. Value Firms
• Glamour Firms – have low book/market ratios
• They are popular so have high market values so
denominator is high
• Value Firms – high book/market ratios
• They are unpopular so have low market values so
denominator is low – ratio bigger
• Glamour firms find their market value decline as a
function of the # of M&As they do
• So their book/market ratios rise over time
• Raghavendra Ra & Theo Vermaelen, 1998,
Journal Financial Economics
“Glamour, Value and Post-Acquisition Performance of
Acquiring Firms.”
Proxy Fights

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 Two Types of Proxy Fights
1. Contests for Seats on the Board of Directors
➢ Insurgent group may be trying to replace
management

2. Contests about management proposals

➢ Mergers or acquisitions
➢ Antitakeover amendments

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 Characteristics That Increase Likelihood of
Proxy Fight Success

1. Management has insufficient voting support

➢ Management does not hold many votes

2. Poor operating performance

➢ The worse it is, the more likely shareholders are
unhappy with management

3. Sound alternative operating plan

➢ Insurgents has good plan to improve shareholder
returns.

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 Proxy Fight Costs
1. Professional Fees – proxy solicitors, attorneys
& public relations professionals
2. Printing, Mailing & Communications Costs
3. Litigation Costs – proxy fights tend to be
actively litigated.
4. Other Fees – miscellaneous fees, e.g., for
tabulators

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 Activist Filings
• Have to file a DEF14A
• Required of nonmanagement proxy
solicitations
• In it activist indicates requested action and
steps it intends to take
 Voting & Institutions
• Most shares owned by institutions
• Explain institutional investors
• They often get proxy advisory firms to
make the recommendations which they
usually follow
• Three biggest:
• ISS
• Glass Lewis
• Egan - Jones
Shareholder Wealth Effects: Early Proxy Fight
Research
• Dodd & Warner (1983) studied 96 proxy fights
➢ Positive 0.105% stock price effect
• DeAngeleo & DeAngeleo(1989) studied 60 proxy
fights
➢ Also found positive stock price effect = 4.85%
in 2-day window around dissident activity &
18.76% during a 40-day window.
• Hypothesis for Positive Stock Price Effects
➢ They help transfer resources to more effective
users.
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 Long-Term Effects of Proxy Fights

• DeAngeleo & DeAngeleo (1989)

➢ Dissidents prevailed 1/3 of the time.
➢ 25% of the firms were either sold or liquidated
shortly after the contest.
➢ Only 20% remained independent with same
management for an extended period of time.
• Conclusion: once a proxy fight starts it is likely
that big changes often will occur. But this does
not mean that the dissidents will get exactly
what they want.
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Other Studies on Proxy Fight Success
• Borstadt and Swirlein (1992)
• Looked at 142 companies traded on
NYSE and AmEx during 1962–1982
• Found dissidents successful 42% of time
• Found shareholders realized a 11% rate
of return

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 Proxy Fights vs. Tender Offers
• Sridharan and Reinganum (1995)
• Sought to find out why tender offers are
selected sometimes and proxy fights other
times
• Found proxy fights tend to occur more often
in cases where the company’s performance
was poor (poor stock performance or low
ROA)
• This give dissidents more to complain about to
shareholders

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 Shareholder Wealth Effects: Proxy Contests

• Mulherin & Poulsen, Journal of Financial Economics (1998)

➢ Looked at 270 proxy contests from 1979-1994
➢ Found proxy contests create shareholder value
➢ Most of the gains come from firms that are acquired
around the contest period.
➢ For firms that are not acquired – when the proxy contest
was associated with changes in management turnover they
created shareholder value.
- They show that management turnover is important as
new management was more likely to engage in
restructuring after proxy contest.
- Management turnover gets rid of poorly performing
mangers.
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 Number of contested solicitations, 1981-2014

60

50

40

30

20

10

0
81 84 87 90 93 96 99 02 05 08 11 14

Source: 2014 Annual Corporate Governance Review, Georgeson Inc.

 Outcomes of Formal Proxy Contests for Board Seats

More companies are

choosing to settle
with dissidents, rather
than take the matter
to a shareholder vote.

Source: FactSet SharkWatch, Wall Street Journal 4/7/08, p. C1

 Success Rate of Proxy Contests
80%

75%

70%

65%

60%

55%

50%

45%

40%

35%

30%
2008 2009 2010 2011 2012 2013 2014

Source: FactSet SharkWatch; Wall Street Journal, 1/2/15, page B2.

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