128 S. Dasgupta and R.G. Hansen
shareholders benefit in the short run.Shleifer and Vishny (2003)argue that if target
shareholders or managers have shorter horizons, they may be willing to trade off the
short run benefits for the long run losses. For example, target management may be close
to retirement or own illiquid stock and options.^40 Shleifer and Vishny (2003)argue that
the example of family firms selling to conglomerates and entrepreneurial firms selling
to firms such as Cisco and Intel in the 1990s fit this story very well. Alternatively, the
bidding firm could simply “bribe” target management—Hartzell, Ofek and Yermack
(2004)find that target management receive significant wealth gains in acquisitions, and
acquisitions with higher wealth gains for target management are associated with lower
takeover premia.
Overall, the theory predicts that cash offers will be made when perceived synergies
are low but the target is undervalued (Q<q). This is likely to be a situation where the
firm needs to be split up and/or incumbent management replaced to improve value, and
will be associated with target management resistance and poor pre-acquisition target
returns. In contrast, stock offers will be made when market valuations are high, but
there is also significant dispersion in market values. Finally, for stock offers to succeed,
there must be a widely accepted “story” about synergies, and target management must
have shorter horizons. Notice that the model also predicts that the short term returns
to bidders in stock offers would be negative if the synergies are not extremely high
(S>Q 1 , i.e., the bidder essentially has a money machine) and the long-run returns
would also be negative. For cash offers, both short and long-term returns should be
positive.
Shleifer and Vishny (2003)argue that the three most recent merger waves nicely
fall into their framework. The conglomerate merger wave of the 1960s was fuelled by
high market valuations and a story about the benefits of diversification through better
management. The acquisition of firms in unrelated businesses might have been more
attractive because target firms in the same industry would also have high market valua-
tions. The targets were often family firms whose owners wished to cash out and retire.
However, since there was really no synergy from diversification, the wave of the 1960s
gave rise to the bust-up takeovers of the 1980s—acquisitions that were in cash, hos-
tile, and of undervalued targets. Rising stock market prices ended this wave of takeover
activity as undervalued targets became more difficult to find. The most recent wave of
the 1990s was ushered in by the rising market valuations. The story of synergy was
reinvented: technological synergies, the benefits of consolidation, and the European in-
tegration.
more apparent than real. It is precisely this kind of inference that is carefully modelled inRhodes-Kropf
and Viswanathan’s (2004)model discussed above.Shleifer and Vishny (2003)brush aside these issues by
assuming that the market is irrational.
(^40) Cai and Vijh (2006)find that in the cross-section of all firms during 1993–2001, CEOs with higher illiq-
uidity discount are more likely to get acquired. Further, in a sample of 250 completed acquisitions, target
CEOs with higher illiquidity discount accept lower premium and are more likely to leave after acquisition.
They also put up lower resistance and speed up the process.