Hostile bids `fail to boost business efficiency'

The London Business School yesterday attacked the almost universal City view that hostile takeovers are a vital mechanism for improving business efficiency. Two days after Northern Electric failed by a hair's breadth to fight off a bid from CE Electric of the US, it emerged that the LBS had found that targets of hostile bids were not generally poor performers in need of a shake-up.

The LBS said the findings contradicted the received wisdom that hostile takeovers, or the threat of them, performed a valuable function in disciplining managers of poorly performing firms.

The challenge to the hostile takeover came at the end of a year in which the Forte hotels and catering group spectacularly lost its bitter fight against a bid from Granada.

The business school was in the 1980s closely associated with Conservative policymakers and the promotion of a free market in corporate control, but its research now backs some of the criticisms of the City's takeover culture made by the Labour Party.

Julian Franks, professor of finance at the LBS, agreed that the school's view on hostile takeovers had changed. He said: "I'm sure that at some period some people, possibly including myself, have been more positive about hostile takeovers than we are today."

However, a long programme of research by the LBS had led to the conclusion that the best spur to improvement of a poor performing company with weak management was the building of a large minority stake by a single shareholder.

This was such an effective mechanism that there should be changes in the rules of the City Panel on Takeovers and Mergers to allow buyers to accumulate stakes above the present limit of 30 per cent without being obliged to make a full bid.

Furthermore, insider dealing rules should be changed to allow large shareholders to collect information on the companies in which they invest without becoming insiders, which prevents them trading the shares. It was not surprising that institutions were frequently uninformed about a company's performance until late in its decline, the LBS believed.

The LBS work backs the scepticism of Labour policymakers about the benefits of hostile bids. Labour has said it will oblige bidders to show that their plans are in the public interest and has also floated the idea of relaxing insider dealing rules to allow large minority shareholders to take a more direct role in management.

Professor Franks said he did not advocate the system widely used on the Continent in which companies are controlled by a network of large shareholders - so that in Germany there were only three hostile bids between 1945 and 1994.

He said: "I would like to see large active shareholders working for shareholder value. On the Continent, [such shareholders] are not necessarily working for shareholder value. It may for their own private benefit." However, he conceded that the proposed changes would reduce the rights of small shareholders compared with large ones.

The LBS analysis is contained in an article in the influential US journal Business Strategy Review. Professor Franks and Colin Mayer, deputy director of Oxford University's school of management studies, summarised a decade of research by academics at the LBS. The research included data on performance before and after a large number of takeovers in the mid-1980s.

Their main conclusion was that the LBS work had shown that hostile takeovers were not motivated by the poor past record of target companies, whose performance tended to be in line with the average of the market.

There was some evidence that takeovers were motivated by poor expectations of future performance.

However, among poorly performing companies, a change in ownership of a significant minority share stake often led to a change of management control. The research showed that this impetus to improved efficiency was not usually accompanied by a full takeover bid.

The paper concluded that: "In other words, changes in minority stakes, rather than hostile takeover bids, are the mechanisms for improving the performance of companies with weaker management."

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Account Manager / Membership Manager

£35 - 38k + Benefits & Bonus: Guru Careers: We are seeking an Account Manager ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

Guru Careers: Associate Director

£50 - 80k: Guru Careers: We are seeking an Associate Director for the Markets ...

Guru Careers: Associate Director / Director of Sound Practices

£60 - 100k: Guru Careers: Our client is looking for an Associate Director of S...

Day In a Page

Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

Uganda's giants are flourishing once again

After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

After 350 years, the riddle of Britain's exploding fleet is finally solved

Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
Airbus has patented a jet that could fly from London to New York in one hour

Airbus has patented a jet that could fly from London to New York in one hour

The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
10 best sun creams for kids

10 best sun creams for kids

Protect delicate and sensitive skin with products specially formulated for little ones
Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

Tate Sensorium

New exhibition at Tate Britain invites art lovers to taste, smell and hear art
Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

Nice guy Finn is making up for lost time – and quickly

He was man-of-the-match in the third Test following his recall to the England side
Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

Remember Ashton Agar?

The No 11 that nearly toppled England
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks