Takeover Defense During IPO Aids Managers

UNIVERSITY PARK, PA--Many firms deploy takeover defenses when they go public, but a study co-authored by a researcher in Penn State's Smeal College of Business suggests that managers use these takeover defenses to ensure the continuation of their personal benefits of control-not to help in the eventual sale of the firm by increasing expected takeover premiums.

"IPO managers are more likely to deploy takeover defenses when their compensation is high, shareholdings are small, and the oversight from non-managerial shareholders is weak. Basically, firm insiders take actions at the time of the IPO to protect their control benefits," explains Laura Casares Field, assistant professor of finance in Penn State's Smeal College of Business. She co-authored the study, "Takeover Defenses of IPO Firms," with Jonathan Karpoff of the University of Washington and Emory University.

"These defenses are more likely when managers benefit personally from their positions, bear little of the effects of share value, and can act independently of non-managerial oversight," says Field.

In their sample of 1,019 industrial firms that went public from 1988 through 1992, 53% have at least one takeover defense at the time of their IPOs. On average, a firm goes public with 1.71 defenses and adopts only 0.19 additional defenses during the five years after its IPO.

Other researchers, Field notes, argue that an IPO is the first stage in the eventual sale of the firm.

"This suggests that a takeover defense can be used to increase the expected takeover premium when the firm eventually is acquired. Our data, however, do not support this argument. We find that the presence of a takeover defense when a firm goes public is negatively related to the subsequent acquisition likelihood and is unrelated to the takeover premium for those firms that are acquired. Thus, it appears unlikely that takeover defenses help in the eventual sale of the firm by increasing expected takeover premiums," says Field.

The researchers examined 15 takeover defenses in their study: anti-greenmail provision; blank check preferred stock; classified board; fair price provision; poison pills; stakeholder clause; shareholder meeting requirements; supermajority vote requirement; unequal voting rights; miscellaneous anti-takeover provisions; freeze-out law; control share acquisition law; fair price law; cash-out law; and poison pill endorsement law.