Takeovers

This paper reviews the existing literature on takeovers. Takeovers are a means to redeploy corporate assets more efficiently and to discipline incumbent management. However, an active market for corporate control also brings about potential inefficiencies. Takeovers may be undertaken for reasons other than value creation and the threat of a control change can induce inefficient actions on the part of target firm management and employees. The functioning of the market for corporate control is further impaired by incentive and coordination problems inherent in the takeover process. When the target firm is owned by many small shareholders, the free-rider problem prevents bidders firms from earning a profit on the tendered shares. We analyse implications of this problem as well as ways to overcome it. As widely held firms are atypical in many countries, we also discuss the impact that target ownership structure has on the incidence and efficiency of control transfers.