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
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
The truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
News
people
News
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the iWatch for you? Well, it depends if you want for the fitness tech, or the style
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own