Abstract
Blockholders impact strategic firm decisions because they are better at monitoring managers than dispersed shareholder groups. Nevertheless, we do not sufficiently understand how preferences of different blockholder types impact strategic firm decisions. We discuss this in the context of takeover premiums offered for publicly listed firms. Prior studies have argued that managers are often tempted to offer excessively high premiums. Consistently, blockholders might better control managers and ensure lower premiums. To better understand the impact of blockholder preferences, we focus on the special case of family firms. Specifically, drawing on the behavioral agency model, we hypothesize that bidders with family blockholders offer lower premiums than bidders with other blockholders or bidders without blockholders. Our empirical results support our hypotheses based on a sample of 149 takeover offers.
Introduction
Numerous scholars have studied the conflict of interest between managers and shareholders since Jensen and Meckling (1976) coined the term principal-agent-conflict. It is well established that managers tend to pursue individual interests such as salary optimization and that shareholders try to protect their own interests by monitoring managers or by providing incentives (Jensen & Murphy, 1990). The degree of shareholder interest protection often depends on the relative power of shareholders and managers. A strong blockholder, that is, a shareholder controlling at least 25% of the voting rights (simply “blockholder” for the remainder of the text), is assumed to affect strategic firm decisions by improving monitoring of managers (Shleifer & Vishny, 1997).
Nevertheless, we currently do not sufficiently understand how different blockholder types affect strategic firm decisions. Most important, ownership concentration simply measures shareholders’ ability to exercise power, whereas the identity of the blockholder implies certain objectives when exercising this power (Thomsen & Pedersen, 2000). Generally speaking, blockholder preferences are heterogeneous regarding risk attitude and reference point (Krause, Whitler, & Semadeni, 2014). We aim at better understanding one blockholder type as a first step to unpack this heterogeneity. Specifically, we choose family blockholders, that is, individuals from one family who are major owners or executives over time or contemporaneously, because they consider financial as well as noneconomic aspects (Gómez-Mejia, Makri, & Larraza-Kintana, 2010; Miller, Le Breton-Miller, Lester, & Cannella, 2007). Family blockholders are also known for “problem framing”, that is, potential outcomes of decisions are compared with current utility, and “loss aversion”, that is, avoiding losses is more important than obtaining gains (e.g., Chrisman & Patel, 2012). We submit that these characteristics significantly affect strategic firm decisions.
We discuss the impact of blockholders and their objectives on strategic firm actions in the context of takeover premiums offered for publicly listed firms. Specifically, we argue that takeover premiums are, on average, too high to be justified by shareholder considerations such as synergies (Hayward & Hambrick, 1997). Thus, excessive takeover premiums might result from managers who pursue their own interests such as salary optimization, whereas differences among nonexcessive premiums might be linked to blockholder preferences. Takeover premiums are an appropriate context for our purposes because takeovers are strategic decisions visible to shareholders. Our approach is consistent with previous studies demanding a stronger focus of analysis on discrete board decisions that are related to agency costs between shareholders and managers (e.g., Mallette & Fowler, 1992; Sundaramurthy, 1996).
We examine 149 takeover offers for publicly listed German firms between 2004 and 2014 to test our hypotheses. This is an exhaustive sample of all takeover offers for publicly listed German firms fulfilling the transparency standards of the German stock market segment “prime standard”. We select Germany because it offers a high number of family blockholders and an active capital market with a sufficient number of public takeover offers (Fiss & Zajac, 2004). Our results support our hypotheses. Bidders with blockholders offer lower takeover premiums than bidders without blockholders. However, our more differentiated regression model reveals that family blockholders offer lower takeover premiums than other blockholders and this effect is reinforced by the presence of a family CEO.
Our study offers several theoretical contributions. First, regarding agency theory, we analyze a potential conflict between managers and shareholders in the context of takeovers. Our sample offers further empirical support for the notion that blockholders are better able to control managers than dispersed shareholder groups. Second, regarding the behavioral agency model (BAM), we show the impact of different blockholder preferences on strategic firm decisions. Specifically, in the context of takeovers, family blockholders’ problem framing and loss aversion is related both to economic as well as noneconomic utility and results in significantly lower takeover premiums. Third, we contribute to the family firm heterogeneity debate by differentiating between different types of family firms (e.g., Miller et al., 2007). Specifically, we argue that a family CEO reinforces the relationship between family blockholders and takeover premiums because a family CEO increases the family’s utility at stake in terms of loss aversion. Fourth, we increase our understanding of the phenomenon of takeover premiums. Specifically, the explained variance of takeover premiums increases after adding the blockholder variable and even further increases if we include different blockholder types.
Our study also offers several practical implications. Minority shareholders need to realize that an investment in a potential takeover target might prove lucrative (if a takeover premium is offered later on), whereas an investment in active bidders in the takeover market should be reassessed regarding sufficient management control (e.g., Jensen & Meckling, 1976). Minority investors considering an investment in likely bidders should not only prefer firms with blockholders in general but with family blockholders in particular. Moreover, takeover targets that receive an offer from a family firm might try to actively seek a potentially higher counteroffer from a nonfamily firm.
Theoretical Background and Hypotheses
The Context of Takeover Premiums
Double-digit takeover premiums, that is, the premiums offered on top of the average share price in the 3 months prior to the first announcement, are the norm for takeovers of publicly listed firms all around the world. For example, although different definitions complicate comparability, Moeller (2005) reports roughly 30% average takeover premiums for a U.S. sample and Moschieri and Campa (2009) report a 24% average takeover premium for a European sample. There are two main lines of argumentation for explaining these takeover premiums.
The first line of reasoning focuses on justifying premiums with potential value generating measures after the takeover. Specifically, poor management of the target firm that fails to maximize shareholder value will be forced out of office by acquirers attempting to extract such value (e.g., Fama, 1980). Alternatively, even given a well-managed target firm, potential synergies between the bidder and the target might justify takeover premiums from a shareholder’s perspective.
The second line of reasoning stresses that premiums cannot be justified with poor target management or synergies. If that is the case, then managers of the bidders do not serve their shareholders’ interests (Morck, Shleifer, & Vishny, 1990). These managers either suffer from hubris, that is, they overestimate their own ability to increase the value of the target company (Hayward & Hambrick, 1997), or they simply ignore shareholder interests in order to pursue their own interests (Berle & Means, 1932). Specifically, managers often succeed in increasing their own salary after increasing firm size with acquisitions (e.g., Bebchuk & Grinstein, 2005; Dominguez-Martinez, Swank, & Visser, 2008). More generally, the term empire building refers to managers’ ability to extract not only higher compensation but also status, power, and prestige from a larger firm (e.g., Jensen, 1986; Jensen & Murphy, 1990; Murphy, 1985; Stulz, 1990). In addition, larger firm size decreases managers’ unemployment risk and makes managers more indispensable (Amihud & Lev, 1981, 1999; Shleifer & Vishny, 1989).
This second line of reasoning (i.e., takeover premiums are, on average, too high) appears convincing given several empirical observations. Most important, previous studies have reported a discrepancy between managers’ enthusiasm for pursuing acquisitions and shareholder returns after acquisitions (Kroll, Walters, & Wright, 2008). Specifically, bidders’ stock prices often fall on the day of a takeover announcement (“adverse market reaction”), indicating that investors on average, do not believe in value creation through takeovers (Hayward & Hambrick, 1997). In addition, looking back on prior acquisitions, many scholars conclude that acquisitions did not meet expectations at the time of the takeover (e.g., Andrade, Mitchell, & Stafford, 2001; Datta, Pinches, & Narayanan, 1992; Jensen & Ruback, 1983). A meta-analysis on the topic has revealed that on average, and across commonly studied variables, acquiring firms’ performance is negatively affected by acquisitions (King, Dalton, Daily, & Covin, 2004). Thus, we assume that on average, takeover premiums cannot be justified with poor target management or potential synergies, but that high takeover premiums are a form of agency costs between shareholders and managers of the bidder.
Blockholders and Takeover Premiums
The main issue in corporate governance research is the nonalignment of ownership and management interests. Due to excessive transaction costs, it is impossible for owners and managers to agree on a complete contract which aligns the interests of both contracting parties (Williamson, 1985). Therefore, managers have a certain level of discretion on how to invest shareholders’ funds (Shleifer & Vishny, 1997).
Monitoring is one key approach to protect shareholders. By gathering and analyzing information, shareholders can intervene in corporate affairs, limit managerial discretion, and protect shareholder interests (Maug, 1998). Consistently, previous studies stress that monitoring affects strategic firm decisions directly (Deutsch, 2005). However, this task is time-consuming and requires shareholders who are actively engaged in business decisions (Almazan, Hartzell, & Starks, 2005). Thus, monitoring is a fixed-cost investment that is only reasonable for larger shareholders. Consequently, dispersed ownership structures allow executives to enjoy personal benefits at the expense of shareholders (e.g., Shleifer & Vishny, 1986). This argument above is reinforced by the so called free-rider problem, that is, the notion that shareholders can benefit from the monitoring efforts of other shareholders as well as by high transaction costs to coordinate monitoring efforts.
Monitoring of managers is sometimes ensured via intermediaries. Specifically, in the German context, publicly listed firms are legally obliged to have a dual board structure, where the executive board is responsible for the day-to-day operations and the supervisory board appoints and monitors the members of the executive board on behalf of shareholders (Dittmann, Maug, & Schneider, 2010). Thus, the supervisory board is a legal instrument to diminish the misalignment of management and shareholder interests by delegating monitoring to experts. Managers supply supervisory board members with information which enables them to monitor strategic decisions such as acquisitions (Kroll et al., 2008). However, managers are rather reluctant to transmit information to supervisory board members because this would limit their discretion (Adams & Ferreira, 2007). Thus, it depends on shareholders’ power to ensure the transmission of information. Consequently, supervisory board members representing dispersed shareholders have higher information asymmetries toward managers than supervisory board members representing blockholders (Desender, Aguilera, Crespi, & García-Cestona, 2013). Generally speaking, the ability to monitor effectively depends on the ability to enforce monitoring mechanisms.
These arguments on monitoring point toward the importance of blockholders. Specifically, large shareholders have strong incentives to gather relevant information and have the power to put pressure on the management (Shleifer & Vishny, 1997). Additionally, blockholders have by definition lower transaction costs relative to the value of their shares than dispersed owners. Thus, while dispersed owners have time and money restrictions to discipline management, blockholders have strong incentives to do so (Anderson & Reeb, 2003; Burkart, Gromb, & Panunzi, 1997). The incentive of blockholders to control management is reinforced through the reduced liquidity of their shares. Specifically, blockholders cannot immediately sell a substantial stake in the company on the stock market without accepting a negative price reaction. Therefore, at least in the short run, they are tied to the firm and do not sell their shares as an alternative to ensuring effective monitoring of managers (Maug, 1998).
Additionally, blockholders are less dependent on the supervisory board to monitor the management. Due to their strong incentive to gather information directly, they have access to insider information (Heflin & Shaw, 2000), are involved in corporate strategy decision making (Davies, 2001), and get extraordinary attention from the management (Useem, 1996). Therefore, they do not only have the power to enforce monitoring but are also able to maintain close ties to the management which grants direct information (Desender et al., 2013). Hence, blockholders are able to monitor misalignment of interests beyond supervisory board meetings.
The potential link between blockholders and the (perceived) quality of strategic firm decisions is supported by stock market reactions. Specifically, Kroll, Wright, Toombs, and Leavell (1997) find positive stock price reactions for firms with blockholders in response to acquisition announcements. This is particularly important given the generally negative stock market reaction to acquisition announcements (Hayward & Hambrick, 1997). Thus, stock markets appear to believe that acquisitions destroy firm value on average, but increase firm value in case of blockholder influence on the acquisition decision.
In summary, ownership concentration in the hand of a blockholder is an essential element in solving the agency conflict between shareholders and managers (Jensen & Meckling, 1976; Shleifer & Vishny, 1997). Specifically, a blockholder lowers agency costs because blockholders can better monitor managers than a group of dispersed shareholders. Based on the notion that high takeover premiums result from insufficiently monitored managers pursuing their own interests, we expect the following hypothesis:
Blockholder Identities and Takeover Premiums
Previous studies have classified several different blockholder identities (or types of blockholders; e.g., Desender et al., 2013). Specifically, scholars have frequently categorized private equity investors, governments, banks, nonfinancial companies, families, and founders (e.g., Shleifer & Vishny, 1997; Thomsen & Pedersen, 2000; Tribo, Berrone, & Surroca, 2007). Out of these blockholder types, the most common around the world is a controlling family (Bianco, Bontempi, Golinelli, & Parigi, 2013; La Porta, Lopez-De-Silanes, & Shleifer, 1999).
Whereas the agency considerations leading to Hypothesis 1 treat blockholders as a monolithic group, we now look at a specific blockholder type in more detail. This is consistent with the notion that owner identities provide important implications for corporate strategy (Thomsen & Pedersen, 2000). According to Desender et al. (2013), we assume that all types of blockholders are able to monitor managers in the context of takeover premiums. Thus, the following differentiation between blockholders does not focus on their ability to monitor but on their respective preferences.
In the context of blockholder categories, it is crucial to point out the ongoing debate regarding controlling families versus controlling lone founders. To structure this debate, Miller et al. (2007) have provided the following definitions:
We distinguish lone founder businesses in which there are one or more founders, who have no relatives in the business, with family businesses in which there are multiple major owners or executives over time or contemporaneously from the same family. (p. 836)
This differentiation helped explain the previously mixed empirical evidence on performance of family versus nonfamily firms (e.g., Anderson & Reeb, 2003; Villalonga & Amit, 2006). The key underlying difference is that family firm owners rather assume the role identities and logics of family nurturers, whereas lone founders tend to embrace the identities and logics of entrepreneurs (Miller, Le Breton-Miller, & Lester, 2011). Most important, in our context of strategic firm actions, this typically results in conservation strategies of family firms versus growth strategies of lone founder firms (Miller et al., 2011). The following arguments leading to Hypotheses 2 and 3 focus only on family firms (sometimes called true family firms) and not on lone founder firms.
Family blockholders are distinctly different from other blockholders in terms of blockholder preferences. Most important, family firms, that is, firms controlled by a family blockholder, are characterized by the BAM (Wiseman & Gómez-Mejia, 1998). According to the BAM, family firm behavior is strongly affected by problem framing and loss aversion (Cyert & March, 1963; Gómez-Mejia, Haynes, Núñez-Nickel, Jacobson, & Moyano-Fuentes, 2007; Wiseman & Gómez-Mejia, 1998). Problem framing stresses that choices are evaluated regarding potential losses and gains compared with current utility (Gómez-Mejia et al., 2010; Kahneman & Tversky, 1979). Loss aversion means that avoiding losses is more important than obtaining gains (Chrisman & Patel, 2012).
In the takeover context, problem framing means that family firms evaluate potential acquisition outcomes compared with pre-acquisition utility. This comparison is relevant because takeovers are not only major firm decisions but also decisions that potentially affect shareholders for many years to come (Kroll et al., 2008). Put differently, firm takeovers are often characterized by their high variance of outcomes. Specifically, there are examples of firm bankruptcies after expensive acquisitions (Hayward & Hambrick, 1997) as well as examples of success stories after adequate acquisitions (Weston, 2002). These observations can be explained not only by the difficulty to properly evaluate a potential target firm but also by the uncertainty regarding the required effort as well as the success probability of the postacquisition integration.
The comparison with preacquisition utility is complicated by loss aversion. This concept is based on prospect theory and stresses that avoiding losses is more important than obtaining gains (Kahneman & Tversky, 1979; Krause et al., 2014). Specifically, avoiding a potential worst-case bankruptcy scenario is far more relevant for families than a potential doubling of utility. In the context of takeover offers for publicly listed firms, the pre-acquisition stock price offers an approximate “fair value” for the target as a stand-alone entity (Fama, 1970). Thus, a loss averse blockholder needs to be convinced that a premium offered on top of this stand-alone fair value can be justified by synergies or other value increasing measures even given a nightmare integration of the target after the acquisition. This can be directly linked to the observation that family firms are particularly parsimonious in resource use (Carney, 2005).
We argue that family blockholders employ problem framing and loss aversion with respect to their overall utility. Many family firm scholars submit that this overall utility consists of both economic and noneconomic utility (e.g., Chrisman, Chua, & Sharma, 2005). This noneconomic utility that families derive from their ownership position in a firm is often referred to as socioemotional wealth or SEW (Gómez-Mejia et al., 2007). In several contexts, family firms face a trade-off between both utilities. For example, Leitterstorf and Rau (2014) demonstrate that family blockholders willingly sacrifice economic utility in terms of share value at the initial public offerings in order to protect their noneconomic utility related to family influence and reputation. Similarly, Gómez-Mejia et al. (2010) observe that many family firms do not diversify firm activities because of their loss aversion with respect to noneconomic utility even if this increases the risk for their economic utility. However, in the takeover context, we argue in the following that family blockholders tend toward lower takeover premiums to protect both their economic and their noneconomic utility.
Regarding the economic utility, it is important that most family shareholders have an insufficiently diversified personal wealth with the majority of wealth tied to the respective family firm (Miller, Le Breton-Miller, & Lester, 2010). Thus, a bankruptcy of the firm has a far greater impact on the economic utility of a family blockholder than on the economic utility of a sufficiently diversified shareholder. Based on this observation, several scholars argue that family firms focus on minimizing bankruptcy risk (Demsetz & Lehn, 1985; Faccio, Lang, & Young, 2001; Shleifer & Vishny, 1997). Consistently, Kroll et al. (2008) argue that members of business-owning families in the supervisory board closely monitor managers in the takeover context because their personal wealth is at stake.
Regarding the noneconomic utility or SEW (Gómez-Mejia et al., 2007), it is important that a “worst-case scenario” of bankruptcy would destroy SEW completely. Our argument that SEW strongly affects family firm decisions (such as takeover offers) is consistent with previous studies. For example, in order to protect SEW, family firms pursue significantly fewer socially or environmentally harmful activities than nonfamily firms (Berrone, Cruz, Gómez-Mejia, & Larraza-Kintana, 2010), conduct more philanthropic activities (Déniz Déniz & Suárez, 2005), avoid downsizing (Stavrou, Kassinis, & Filotheou, 2007), implement more care-oriented contracts for nonfamily managers (Cruz, Gómez-Mejia, & Becerra, 2010), and diversify less if diversification makes it more difficult to place trusted family members in key positions (Gómez-Mejia et al., 2010; Jones, Makri, & Gómez-Mejia, 2008).
In addition to the higher bankruptcy costs for family blockholders (due to SEW and insufficient wealth diversification), family firms have patient capital (Sirmon & Hitt, 2003) and scrutinize business opportunities with greater intensity than other firms (Anderson & Reeb, 2004). Thus, if excessive takeover premiums are required for acquiring a specific target (e.g., in times of overoptimism at stock markets), a family firm might opt for investing in government bonds or hording cash. This is underlined by most families’ particular interest in liquidity buffers (Astrachan & McConaughy, 2001).
In summary, we argue that all blockholders have the same levers for controlling managers, but that family blockholders differ from other types of blockholders regarding how they use these levers. Specifically, problem framing and loss aversion of family firms result in a cautious approach toward takeovers that are characterized by their potentially extreme impact on business success. Thus, we expect the following hypothesis:
Family CEOs and Takeover Premiums
The CEO of a firm is a key person involved in strategic firm decisions. Most important, the CEO is not only a key actor with the discretionary power to take certain decisions unilaterally but also influences the firm’s overall decision-making process (Gómez-Mejia et al., 2010). Specifically, CEOs usually set the board’s agenda and steer the flow of information (e.g., Desender et al., 2013; Tuggle, Sirmon, Reutzel, & Bierman, 2010). In the takeover context, CEOs are usually extensively involved because acquisitions require high-level negotiations, involve major corporate outlays, and often fundamentally affect the firm (Haspeslagh & Jemison, 1991). Thus, it is not surprising that previous studies on takeovers premiums have highlighted CEO effects. For example, Hayward and Hambrick (1997) argue that CEO hubris is positively linked to takeover premiums because hubris leads to an overestimation of personal abilities to extract potential synergies from the takeover target. In our context, the key question is whether different types of CEOs affect the main relationship between family firm status and takeover premiums.
The most prominently discussed CEO aspect in the family firm literature is whether the CEO is part of the business-owning family or not (e.g., Bennedsen, Nielsen, Perez-Gonzalez, & Wolfenzon, 2007; Jaskiewicz & Luchak, 2013). Surprisingly, there is no universally valid and generally accepted assessment of these two CEO types. For example, advocates of family CEOs stress that they are often endowed with firm-specific knowledge (Morck, Shleifer, & Vishny, 1988) and are more likely to exploit social capital (Uhlaner, Matser, Berent-Braun, & Flören, 2015), whereas critics highlight that choosing a candidate from the restricted labor pool of the family excludes potentially more qualified candidates (Anderson & Reeb, 2003). Given the importance of CEOs for strategic firm actions as well as the relevance of CEO types for family firms, we analyze how family versus nonfamily CEOs affect takeover premiums. If family firms with and without family CEOs follow the principles of problem framing and loss aversion in the takeover context, then differences between these two types of firms could be based on a different reference point when taking the decision on a takeover offer. In the following, we will analyze this starting point from the noneconomic as well as the economic perspective.
From a noneconomic perspective, we argue that a family CEO increases the emotional attachment of the family to the firm due to the daily exposure to the firm’s affairs. Naldi, Cennamo, Corbetta, and Gómez-Mejia (2013) argue that a family CEO is a key element in SEW preservation of business-owning families. More specifically, the practice of having a family CEO facilitates the attainment of SEW objectives such as execution of control over the firms’ resources due to the CEO’s direct involvement in the management (Chua, Chrisman, & Sharma, 1999; Hall & Nordqvist, 2008). In addition, stakeholders such as employees directly associate firm decisions publicly announced by a family CEO with the business-owning family. Thus, the link between firm publicity and family reputation is reinforced in case of a family CEO (Berrone et al., 2010; Vardaman & Gondo, 2014). Based on these arguments, we suggest that a family CEO increases the noneconomic utility that the respective family draws from the firm.
From an economic perspective, a family CEO increases the economic dependence of the family on the firm for two reasons. First, in most cases a family CEO receives a compensation for working for the respective family firm and consequently does not generate relevant salaries from outside the firm. Second, in case of serious crises, a family CEO might have difficulties finding a comparable job in other firms (Gómez-Mejia, Larraza-Kintana, & Makri, 2003). This is supported by the notion that the extensive firm-specific human capital of the family CEO (Morck et al., 1988) is valuable for the respective family firm but not for other potential employers. Thus, if the CEO is a family member, then the economic utility that the respective family draws from the firm is increased.
In summary, both the economic as well as the noneconomic family utility at stake in case of a potential bankruptcy is significantly increased if the CEO is a member of the business-owning family. Given the BAM element of problem framing, this results in a higher pre-takeover utility that potential outcomes of decisions are compared against. Consequently, a family firm with a family CEO is even less likely to offer excessively high takeover premiums that might endanger the firm. Thus, we expect the following hypothesis:
Method
Sample
Our sample consists of all 149 takeover offers between 2004 and 2014 for publicly listed firms in the German prime standard, that is, the stock market segment for relatively large and transparent firms. Germany offers an active stock market with a high number of family firms, often considered the backbone of the German economy (Fiss & Zajac, 2004). Consistently, according to our definition, almost one third of bidders in our sample are true family firms. The size of takeover targets is, on average, greater than €1 billion in terms of offer price multiplied by the number of shares.
We employ several data sources for our analysis. First, the list of takeover offers including announcement dates and the involved firms was obtained from BaFin, the German stock market regulator. Second, details on each takeover offer such as offer price were manually collected from the respective takeover prospectus. Third, stock market data such as the shares prices of takeover targets before the initial announcement of takeover intentions by the bidder were derived from Datastream. Fourth, missing data, in particular, on ownership structures were completed with databases from Bureau Van Dijk (DAFNE/AMADEUS). Employing these sources is not only necessary for collecting data directly related to the variables in our hypotheses but also for several control variables that according to previous studies potentially affect acquisition outcomes (e.g., Kroll et al., 2008).
Variables
Takeover Premium
In the context of German takeover offers, the 3-months weighted stock average before the first announcement of takeover intentions is defined as the main reference point by the German stock market regulator BaFin. Thus, we calculate the natural logarithm (in percentage) of the price offered on top of this 3-months weighted average. We focus on takeover premiums offered (in contrast to takeover premiums actually paid) in order to include nonsuccessful takeover offers that also show bidders’ willingness to pay.
Market Capitalization
We control for size of the target firm, defined as the natural logarithm of market capitalization based on the offer price and the number of shares. Information tends to be more readily available about larger firms, which could affect valuations. We used market capitalization as it measures the equity side of the target and hence the related deal size (e.g., Ang & Kohers, 2001; Leitterstorf & Rau, 2014).
Control Before Offer
Takeover premiums are influenced by information asymmetries between bidders and targets and a high ownership stake in a firm grants access to more detailed information on the firm (Desender et al., 2013). Thus, we assess the percent of shares that the bidder owns of the target before the takeover announcement because this might allow the bidder to value the target more appropriately and to adjust the offered takeover premium.
Target Age
We calculate the natural logarithm of the difference between the year of the takeover offer and the founding year of the target firm. Generally speaking, a firm’s valuation uncertainty declines with increasing age because of the track record of the business model (e.g., Capron & Shen, 2007).
Market to Book Ratio
We calculate the market to book ratio as the market value of the target (based on Laamanen, 2007) divided by the last available book equity before the takeover announcement. The market to book ratio has been shown to correlate strongly with Tobin’s q, an alternative variable frequently employed for firm valuations (Villalonga, 2004) and appears appropriate in the takeover context due to the ratio’s focus on equity.
Stock Performance
Consistent with prior studies (e.g., Hayward, 2002), we control for each target’s stock market return in the 12 months before the first announcement of the takeover intentions. A strong stock market performance might cause overoptimism with respect to the target’s potential.
Bidder Age
We calculate the natural logarithm of the difference between the year of the takeover offer and the founding year of the bidder. We include bidder age in our analysis to ensure that we truly measure the effects of different blockholder identities and not the related average differences in terms of firm age (e.g., Block, Miller, Jaskiewicz, & Spiegel, 2013; Hansen, 1992).
Fixed Effects
Year dummies were included for each of the years represented in our sample (2004-2014) 1 in order to control for temporal effects unique to the various years (Hayward, 2002). Furthermore, we used Standard Industrial Classification (SIC) industry dummies 2 to take industry effects into account. This is consistent with prior studies (e.g., Block et al., 2013).
Blockholder
We assign a dummy variable equal to one if the bidder has a blockholder with at least 25% of equity. This threshold is reasonable for our sample because in Germany, a 25% stake grants the right to block major firm decision.
Family Blockholder
Consistent with Miller et al. (2007), we define a (true) family firm as a firm “in which there are multiple major owners or executives over time or contemporaneously from the same family”. The blockholder threshold of 25% is consistent with the family firm definition by the European Commission (2009). Family blockholder is treated as a dummy variable by assigning a value of one to family firms.
Family CEO Blockholder
Within the group of family firms, we further differentiate with respect to the CEO. We assign an additional dummy variable equal to one if the CEO is a member of the business-owning family (e.g., Anderson & Reeb, 2003).
Lone Founder Blockholder
We follow the definition of Miller et al. (2007, p. 837): “Lone founder firms are defined as those in which an individual is one of the company’s founders with no other family members involved, and is also an insider (officer or director) or a large owner.” This results in a dummy variable equal to one if a lone founder is present.
Bank Blockholder
We assign a dummy variable equal to one if the blockholder is a bank. Banks as blockholders might differ from other blockholders with respect to their impact on takeover premiums because they focus on generating information and building relationships rather than monitoring managers (e.g., Dittmann et al., 2010).
Government Blockholder
We assign a dummy variable equal to one if the blockholder is a government or a firm fully controlled by a government. Governments might differ from other blockholders because they include political interests such as employment in their considerations (Thomsen & Pedersen, 2000).
Private Equity Blockholder
We assign a dummy variable equal to one if the blockholder is a private equity firm. Private equity funds might differ from other blockholders because they sometimes are under time pressure to invest which might affect the willingness to take risks in terms of takeover premiums (Metrick & Yasuda, 2010).
Other Blockholder
We assign a dummy variable equal to one if the blockholder is not part of one of the above defined blockholder types. Examples of other blockholders include cooperatives (two observations) and cooperations (two observations). We bundle these types due to their low number in our sample (4 out of 149 takeover offers).
Results
Binary correlations among our research variables appear in Table 1. The following results in Table 1 are particularly noteworthy. First, most correlation coefficients are rather low, except, of course, for those between the different family firm variables. Second, takeover premiums are negatively correlated with the existence of a blockholder as well as with family firm status. Consistent with prior studies, we examine the variance inflation factors to test for multicollinearity (e.g., Kroll et al., 2008). None of the variance inflation factors approaches the commonly accepted threshold of 10; the highest is 1.95. These results suggest that multicollinearity is not a problem in our analysis.
Correlations.
Note. This table displays descriptive statistics and binary correlations for 16 variables used in our analysis. Ownership data and founding years are taken from Bureau Van Dijk databases (DAFNE/AMADEUS), accounting data from the takeover prospectus, and market data from Datastream. Presented are means (M), medians (p50), and standard deviations (SD). Please note that variables 8 to 16 are dummy variables resulting in medians of either 1 or 0.
Tables 2, 3, and 4 provide an overview of key descriptive statistics along three main dimensions. Table 2 differentiates premiums according to the bidder’s shareholder structure. Bidders with diluted shareholders offer, on average, the highest premiums and bidders with lone founder or family blockholders offer, on average, the lowest takeover premiums. Table 3 shows the average premiums offered in each year and underlines the importance to control year effects. Table 4 offers a similar overview by showing premiums for different target industry groups based on SIC codes.
Descriptive Statistics on Blockholder Types.
Note. This table displays descriptive statistics for blockholder types observed in our sample. Blockholders are defined as shareholders with at least 25% of equity. “Diluted” indicates a bidder without any controlling shareholder. Presented are means (M), medians (p50), and standard deviations (SD) of takeover premiums (natural logarithm) for each blockholder type.
Descriptive Statistics Over Time.
Note. This table displays descriptive statistics on the distribution of takeover offers over time. Presented are number of observations for each year as well as annual means (M), medians (p50), and standard deviations (SD) of takeover premiums (natural logarithm).
Descriptive Statistics on Industry Sectors.
Note. SIC = Standard Industrial Classification. This table displays descriptive statistics on the distribution regarding the industry sectors of the sample. Presented are number of observations for each one-digit SIC code as well as means (M), medians (p50), and standard deviations (SD) of takeover premiums (natural logarithm) for each industry sector.
Table 5 presents the results of our regression analyses. In our control model, only the variables controlling for bidder age affect takeover premiums significantly. Model 1 offers empirical support for our argument that the existence of a blockholder lowers takeover premiums significantly. However, more important, Model 2 reveals that blockholder effects need to be differentiated by blockholder identities. Specifically, only the family blockholder variable affects takeover premiums significantly. Finally, Model 3 demonstrates that the family blockholder effect is stronger in case of a family CEO. Our results also improve our understanding of the phenomenon of high takeover premiums. Specifically, the adjusted R2 (measuring the explained variance of the dependent variable) increases from .04 to .05 for the general blockholder effect and to .09 for the more differentiated blockholder effects. Thus, blockholders appear to be crucial for explaining different takeover premiums.
Regression Results.
Note. FE = fixed effects; Y = yes. This table presents results for regressions with robust standard errors. The logarithm of the average 3-month takeover premium offered is the dependent variable in all models. For each variable, the table displays the slope estimate and, in parentheses, the robust standard errors. Diluted shareholder structure is the omitted reference category for the different blockholder types analyzed.
p < .1. *p < .05. **p < .01.
We can also interpret the economic significance of the coefficients. First, the coefficient for family blockholder is −0.98 in terms of the logarithm of the takeover premium. If we reverse the logarithm, this corresponds to 0.38 indicating that, ceteris paribus, the predicted takeover premiums is reduced by 62% in case of a family blockholder when compared with diluted shareholder structures (the reference category). Second, the coefficients are −1.10 for family CEOs and −0.83 for nonfamily CEOs. If we reverse the logarithm, this corresponds to 0.33 and 0.44 indicating, ceteris paribus, predicted reductions of premiums by 67% in case of a family CEO and 56% in case of a nonfamily CEO (both compared with diluted shareholder structures). Given the average size of takeover targets of more than €1 billion, this results in double-digit million Euro sums offered less in case of family blockholders.
Robustness of Results
The calculation of takeover premiums hinges on what we consider the relevant pre-offer stock price of the target. As stated in the variable description section, we employ the weighted 3-months average of the daily stock closing prices for several reasons: A point in time too close to the takeover announcement might be biased by rumors and a point in time too early (e.g., a year before the takeover) is hardly relevant (e.g., Hayward & Hambrick, 1997). In addition, a weighted average reduces the effect of short-term random stock price movements. Nevertheless, we would like to test the robustness of our results with respect to different takeover premium definitions (e.g., Hayward & Hambrick, 1997). Specifically, as an alternative measure, we calculate takeover premiums based on the last closing price before the first announcement of the takeover intention as well as the closing price 1 month before that date. Table 6 shows that we find empirical support for Hypothesis 2 for these different takeover premium definitions.
Robustness of Results With Respect to Takeover Premium Definitions.
Note. FE = fixed effects; Y = yes. We recalculated Model 2 of Table 5 with different takeover premium definitions to ensure the robustness of our results. In one model, the premium is defined as the natural logarithm (in percentage) of the price offered on top of the stock price 1 day before the announcement of the takeover intention. In the other model, the reference price for calculating the premium is 1 month before the announcement. For each variable, the table displays the slope estimate and, in parentheses, the robust standard errors. We find in both of these models that a family blockholder significantly lowers takeover premiums offered. Diluted shareholder structure is the omitted reference category for the different blockholder types analyzed.
p < .1. *p < .05. **p < .01.
Our results might also depend on the equity threshold employed for our blockholder definition (e.g., Miller et al., 2007). Thus, we recalculated our regression model with the equity thresholds of 10%, 20%, 30%, and 50%. Table 7 shows that we find empirical support for Hypothesis 2 for all of these equity thresholds.
Robustness of Results With Respect to Blockholder Definitions.
Note. FE = fixed effects; Y = yes. We recalculated Model 2 of Table 5 with different blockholder definitions to ensure the robustness of our results. The table presents results for regressions with robust standard errors for four different equity thresholds as a basis for defining blockholders. For each variable, the table displays the slope estimate and, in parentheses, the robust standard errors. We find in all of these models that a family blockholder significantly lowers takeover premiums offered. Diluted shareholder structure is the omitted reference category for the different blockholder types analyzed.
p < .1. *p < .05. **p < .01.
Discussion and Conclusion
In short, we discuss agency costs and blockholder preferences for strategic firm decisions in the context of takeover premiums. We chose this context because takeovers are strategic firm decisions that are visible for shareholders and strongly affect the economic success of the firm. Thus, shareholders are likely to express their preferences regarding takeovers. In addition, takeover premiums are an important market phenomenon that has not yet been fully explained with respect to both average size as well as variance.
Regarding agency costs, we demonstrate that a blockholder is an essential element in solving the agency conflict between shareholders and managers (Jensen & Meckling, 1976; Shleifer & Vishny, 1997). Specifically, blockholders lower agency costs because they can better monitor managers than a group of dispersed shareholders. We assume that takeover premiums are, on average, too high to be justified by shareholder considerations such as synergies and consequently represent agency costs between managers and shareholders of the bidder. This assumption is strongly supported by prior empirical evidence (e.g., King et al., 2004). Specifically, we assume that high takeover premiums result from insufficiently monitored managers pursuing their own interests. Based on this assumption, we argue that firms with blockholders offer lower takeover premiums than firms with dispersed shareholder structures.
Regarding blockholder preferences, we focus on the special case of family blockholders. We argue that all blockholders have the same levers to control managers, but that family blockholders differ from other types of blockholders regarding how they use these levers. Specifically, problem framing and loss aversion of family firms result in a cautious approach toward takeovers that are characterized by their potentially extreme impact on the economic success of the firm as well as on the family’s SEW. Thus, the potential worst-case scenario of a bankruptcy after a failed acquisition would result in a decrease of utility that is stronger for a family blockholder than for a different type of blockholder in a similar situation (without SEW and with a lower economic dependence on the respective firm).
Family firm scholars stress in the so-called family firm heterogeneity debate that different types of family firms differ significantly from each other (Chua, Chrisman, Steier, & Rau, 2012; Pazzaglia, Mengoli, & Sapienza, 2013). A prominently discussed heterogeneity dimension is whether the CEO is part of the business-owning family (e.g., Bennedsen et al., 2007). We argue that in case of a family CEO, the family’s economic dependence on the firm as well as the emotional attachment to it is higher. Consequently, the economic as well as the noneconomic family utility at stake (in the extreme case of bankruptcy) is higher. Thus, the reference point of pre-takeover utility is higher resulting in a reinforced relationship between family firm status and takeover premiums.
Our empirical results support our hypotheses. Specifically, firms with blockholders offer, on average, lower takeover premiums than firms without blockholders. However, more important, if we differentiate blockholder identities, family blockholders offer significantly lower premiums than other types of blockholders. This relationship between the existence of a family blockholder and takeover premiums is reinforced if the CEO is a member of the business-owning family.
Our study offers several theoretical contributions. First, regarding agency theory, we demonstrate the beneficial impact of blockholders on a potential conflict between managers and shareholders in the context of takeovers. Second, regarding the BAM, we show the impact of family firms’ problem framing and loss aversion on strategic firm decisions. Third, we contribute to the family firm heterogeneity debate by analyzing the effect of family CEOs. Specifically, the BAM appears to appropriately describe strategic firm decisions of family firms with and without family CEOs, but family CEOs appear to increase the family’s reference point in terms of pre-decision utility. In addition, our results improve our understanding of the phenomenon of takeover premiums. Specifically, the explained variance of takeover premiums increases after adding the blockholder variable and even further increases if we include different blockholder types.
Our study also offers several practical implications. Minority shareholders need to realize that an investment in a potential takeover target might prove lucrative (if a takeover premium is offered later on), whereas an investment in active bidders in the takeover market should be reassessed regarding sufficient management control (e.g., Jensen & Meckling, 1976). Investors assessing likely bidders should not only prefer firms with blockholders in general but family blockholders in particular. Moreover, takeover targets that receive an offer from a family firm might try to actively seek a potentially higher counteroffer from a nonfamily firm.
Our conclusions need to be considered in light of some limitations. First, we assume that takeover premiums are, on average, too high to be justified by synergies or value increasing measures. This assumption is crucial for the development of our hypotheses. However, empirical evidence from many prior studies support this argument (e.g., Andrade et al., 2001). Moreover, King et al. (2004) showed in a meta-analysis that, on average and across commonly studied variables, acquiring firms’ performance is negatively affected by acquisitions. Second, our sample focusses on bidders’ decision to attempt a takeover. Consequently, a firm’s decision against making a takeover offer (e.g., motivated by loss aversion) is not included. Third, due to the moderate size of our sample, some of the commonly defined blockholder identities are hardly represented. Fourth, although we had strong reasons to choose Germany for our empirical data, we have to acknowledge that the relatively high number of firms with a family blockholder is a characteristic of Continental Europe rather than Anglo-Saxon markets.
This study has helped us identify several avenues for future research. Additional research might focus on the potentially varying monitoring abilities of different blockholder types. Furthermore, empirical support is needed for the idea that family firms refrain more often from making a takeover offer than other types of firms. Moreover, interviews with bidder CEOs could reveal additional motivations for takeover premiums. Most important, we argue that the relationship between the existence of a blockholder and strategic firm actions is too simplistic and that we have to unpack the heterogeneous group of blockholders. We address this issue by developing hypotheses for the specific subgroup of family blockholders by drawing on the key aspects of the BAM. Of course, this is only a first step and future research needs to look in more detail at other blockholder groups. Based on our study, we can only speculate on the exact preferences of the individual blockholder groups, but we can argue and empirically support that the preferences of family firms result in particularly low takeover premiums.
Several objectives of other blockholder types in our sample might serve as a starting point for future analyses. First, banks have a natural interest in selling their financial services such as support at issuing debt. Thus, banks as blockholders might focus on generating information and building relationships rather than monitoring managers (e.g., Dittmann et al., 2010). In an extreme scenario, a bank blockholder accepts that managers offer excessive takeover premiums because the advisory fee for the bank in the following takeover outweighs the economic damage of the excessive premium. Second, governments as blockholders include political aspects such as employment in their considerations (Thomsen & Pedersen, 2000). Thus, a government might allow managers to pay excessive premiums if the takeover increases the number of jobs provided in the respective country. Third, a private equity fund that has collected capital is under pressure to invest this money quickly because most funds raise capital every 3 to 5 years and need to show success stories (Metrick & Yasuda, 2010). Thus, under time pressure, a private equity blockholder might accept a higher risk with respect to whether a certain takeover premium pays out during the investment horizon. Fourth, lone founders typically follow growth rather than conservation strategies (Miller et al., 2011). This ambition to grow could tempt lone founders to offer premiums with a relatively high risk of not being justified (e.g., by synergies).
Family firm researchers are often asked to not only apply research results from more mature research areas to the special case of family firms but to actively return insights to these research areas. We base this article on the existing discussion regarding the strategic decision of offering takeover premiums. By analyzing the special blockholder identity of family firms, we offer a key explanation for the variance in takeover premiums that is relevant beyond family firm research. We hope that our research enriches the discussion on how blockholder preferences differ and how these preferences affect strategic firm decisions.
Footnotes
Acknowledgements
We would like to thank two anonymous reviewers from the Academy of Management for their helpful comments.
Authors’ Note
Our article has been accepted for presentation at the Academy of Management, 2015 in Vancouver, Canada.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
Notes
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References
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