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Companies Take a Hit When Declining a Good Takeover Bid

Yahoo has been making headlines recently with stories about its troubling performance, and many have begun speculating that the company is failing at its attempt for a turnaround. The Wall Street Journal reported last week that executives at Verizon Communications have expressed interest in buying the company but this isn’t the first attempt at a Yahoo! Inc. takeover.

In 2008, Microsoft attempted to do so with the company’s first public bid, valued at approximately $47 billion, representing more than a 60 percent premium over Yahoo’s pre-bid stock price. Yahoo executives rebuffed the offer, suggesting that it undervalued the firm’s strategic opportunities. Facing a hostile proxy fight, Microsoft increased its offer by 14 percent, but this bid was also rejected. As a result, Microsoft rescinded the offer.

In a recent paper Drexel’s David Becher, PhD, an associate professor of finance in Drexel’s LeBow College of Business, and his co-author took a look at how resisting a “good” takeover affects companies. They also looked at what happens when firms turn down bad bids. The paper, “Bid Resistance by Takeover Targets: Managerial Bargaining or Bad Faith?” is forthcoming in the Journal of Financial and Quantitative Analysis.

“Sometimes, an offer is rejected because it’s a bad deal. But oftentimes, companies turn down a good deal—probably because the target is entrenched,” Becher explains. “Which is why we pay CEOs with stocks—to incentivize them to make the best decisions for shareholders.”

Becher and his co-author began by determining how much is enough to qualify as a “good offer.” The average premium, they found, of a good offer was 40 percent over current stock price – give or take depending on factors such as industry, company size, performance/profitability, economic climate, etc.

They came up with a measure they call abnormal premium—a “positive abnormal premium” is an offer above what a company should expect to get, and a “negative abnormal premium” is an offer that’s below it.

The researchers then evaluated thousands of recent takeover bids that did not go through. “We looked at what happened to firms that turned down offers for mergers—broken down by offers that were more, or less, than expected —and what happened next,” Becher said.

“What we find is firms that turn down good offers tend to be punished. They are more likely to eventually go out of business or be delisted from the stock exchange. The CEO is more likely to be pushed out, and they tend to do worse, fiscally.”

When the company turns down a bad deal for shareholders, then the stock price could continue to climb. Such was the case of the Exelon bid for NRG during the recent recession. When the stock price was at a low point for NRG, the 40 percent premium was not a good deal for the company and as a result NRG declined the offer, according to Becher. Exelon continued to force a deal and even though Exelon ended up buying enough shares to own NRG, the company could not convince NRG to accept a takeover. Meanwhile the stock price continued its upward trajectory.

As for Yahoo, according to Becher, the company is a classic example of the market punishing a company for turning down a good bid. The bid’s withdrawal coincided with a 15 percent reduction in Yahoo’s market value—drawing the ire of shareholders. Pointed criticism was directed at the negotiating skills of then Yahoo CEO Jerry Yang, who was eventually replaced.

More information about the paper is available at the LeBow College of Business website at this link. Media interested in speaking with David Becher, PhD, should contact Niki Gianakaris at ngianakaris@drexel.edu or 215-895-6741.

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