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
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas