market for corporate control

This was first described in an article by HG Manne, "Mergers and the Market for Corporate Control". In addition, bidders have some strategies for dealing with poison pills: they can make a tender offer contingent on the target-company board nullifying the pill, and they can launch a proxy contest, in which they solicit target shareholders’ votes to unseat the incumbent directors of the target company. Because these investors enjoy the benefits of diversification, they are more willing to invest far more money at far lower expected rates of return than they would be if they had to “put all of their eggs in one basket.”. The disciplinarians are the consumers. It disciplines the managers of corporations with publicly traded stock to act in the best interests of shareholders. Here the disciplinarians are shareholders. The only way they can assure themselves of doing this is by selling their shares. The market for corporate control is the market for the right to control the management of corporate resources. This was first described in an article by HG Manne, "Mergers and the Market for Corporate Control". When business needs a lot of money to operate, either because there are economies of scale or scope in operation or because the business is highly capital intensive (such as manufacturing), selling shares to the public is often the only—and is generally the most efficient—way to accumulate such capital. First, antitakeover laws are a bad way to protect these other constituencies because any protections such statutes provide create large inefficiencies by reducing the quantity and quality of the monitoring of public companies’ management. The market for corporate control is the role of equity markets in facilitating corporate takeovers. Poison pills are rights freely distributed to target-company shareholders that give the shareholders the “right” to purchase shares in the target firm (or the bidding firm in case of a merger) at significant discounts in price when a “triggering event” occurs. By replacing the directors of the target, the bidder can take control of the board and nullify the pill itself. But along with the massive economic and social benefits of public companies come costs. This paper reviews much of the scientific literature on the market for corporate control. A more controversial and potent defense is the shareholder rights plan, popularly known as the “poison pill” defense. The bidder profits when the new management team gets results, which come in the form of improved corporate performance, higher profits, and, ultimately, higher share prices. Jonathan Macey is Sam Harris Professor of Corporate Law, Corporate Finance and Securities Regulation at Yale Law School. One way to deal with this problem is to permit bidders to disguise their identities and to make their bids on a first-come, first-served basis. How do companies protect themselves from hostile bids. The Delaware statute prohibits a hostile acquirer from completing a takeover by merging with the target for at least three years after buying a controlling interest unless the bidder either obtains the approval of the target company’s board of directors or acquires more than 85 percent of the target’s stock. In a takeover, an outside party seeks to obtain control of a firm. This is because another provision of the statute requires any bidder to make the same disclosures within ten days of acquiring 5 percent of the shares of a public company, regardless of how those shares were acquired. To understand the importance of the market for corporate control, one must first understand the economics of the public corporation. Other costs associated with the market for corporate control involve the transaction costs of writing the contracts necessary to protect target-firm shareholders from collective-action problems and to align the incentives of target-firm managers and their shareholders. This Quick Guide examines the market for corporate control. [1] According to Manne: The lower the stock price, relative to what it could be with more efficient management, the more attractive the take-over becomes to those who believe that they can manage the company more efficiently. Happily, there are many contractual solutions—called “defensive tactics”—to this collective-action problem, and managers have strong incentives to employ these contractual solutions to protect their shareholders and themselves. Once the acquirer announces the information, other share buyers bid up the price of the target company’s shares, giving a gain to the acquirer, who did all the costly research, only on his 5 percent of the shares. Edward Stringham, Jack Vogel The leveraged invisible hand: how private equity enhances the market for corporate control and capitalism itself, European Journal … In this way the market for corporate control could magnify the efficacy of corporate governance rules, and facilitate greater accountability of directors to their investors. Worse, if the bidder is thought to be lazy or inattentive or dishonest, rational target-firm shareholders may rush to sell their shares in what is known as a “coercive tender offer.” A sort of coercion is said to occur because shareholders want to avoid winding up as minority shareholders in a firm run by an inept or unscrupulous bidder. A major financing innovation involves the use of the assets in the target company to secure a loan to acquire the target’s own shares. By buying up enough shares to vote in a new board of directors, a bidder can then replace an inefficient or ineffectual management team.

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