Capital Constraints
Youneed to raise capitalto acquire firms that arepoorly
managed, and any constraints on that process can impede
hostileacquisitions.Itshouldcomeasnosurprisethathostile
acquisitions are rare in economies where capital
markets—equityanddebt—are notwelldeveloped.In fact,
formuchofthepast century,badlymanagedcompaniesin
Europe were at least partially shielded from hostile
acquisitions by the absence of an active corporate bond
market and the reliance of companies on bank loans. The
acquisitionofTelecomItaliabyOlivettiin1999,whichwas
oneoftheveryfirstlargehostileacquisitionsinEurope,was
facilitatedbyOlivetti’suseofthenascentEurobondmarket.
ItisentirelypossiblethatOlivettiwouldhavefailedinitsbid
if it had had to approach Italian banks for the same funding.
In general, then, we would argue that the likelihood of
changingthemanagementinbadlymanagedfirmsisgreater
whenfinancialmarketsareopenandfundsareaccessibleat
lowcosttoawidevarietyofinvestors(andnotjusttolarge
corporationswithgoodcreditstanding).EvenintheUnited
States, the likelihood of hostile acquisitions increased
dramatically in the 1980s when Michael Milken and his
compatriotsatDrexelBurnhamLambertopenedupthejunk
bondmarket,allowinghostileacquirerslikeT.BoonePickens
andCarlIcahntoissuebondswithlittleornoassetbackingto
fund hostile takeovers.
Capital constraints do have a disproportionate effect,
providinggreaterprotectionforlargermarketcapcompanies
thanforsmallerones.Afterall,ahostileacquirer,evenina
restrictedcapitalmarket,maybeabletoraise$1billionto