Cambridge University Press University of Washington School of Business Administration

Motives for Takeovers: An Empirical Investigation
Author(s): Elazar Berkovitch and M. P. Narayanan

Source: The Journal of Financial and Quantitative Analysis, Vol. 28, No. 3 (Sep., 1993), pp.
347-362
Published by: Cambridge University Press on behalf of the University of Washington School of
Business Administration
Stable URL: http://www.jstor.org/stable/2331418 .
Accessed: 15/09/2014 14:29
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp
.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.
Cambridge University Press and University of Washington School of Business Administration are collaborating
with JSTOR to digitize, preserve and extend access to The Journal of Financial and Quantitative Analysis.
http://www.jstor.org
This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

All use subject to JSTOR Terms and Conditions
OF FINANCIAL
JOURNAL ANALYSIS
ANDQUANTITATIVE VOL.28, NO. 3, SEPTEMBER
1993
Motives for Takeovers: An Empirical Investigation
Elazar Berkovitch and M. P. Narayanan*
Abstract
Three major motives have been suggested for takeovers: synergy, agency, and hubris.
Existing empirical evidence is unable to clearly distinguish among these motives probably
due to the simultaneous existence of all three in any sample of takeovers. This paper suggests
a way of distinguishing among these competing hypotheses by looking at the correlation
between target and total gains. It is argued that this correlation should be positive if synergy
is the motive, negative if agency is the motive, and zero if hubris is the motive. The empirical
results show that synergy is the primary motive in takeovers with positive total gains even
though the evidence is consistent with the simultaneous existence of hubris in this sample.
It is also found that agency is the primary motive in takeovers with negative total gains.
I. Introduction
Three major motives for takeovers have been advanced in the literature: the
synergy motive, the agency motive, and hubris. The synergy motive suggests that
takeovers occur because of economic gains that result by merging the resources of
the two firms. The agency motive suggests that takeovers occur because they en-
hance the acquirer management's welfare at the expense of acquirer shareholders.
The hubris hypothesis suggests that managers make mistakes in evaluating target
firms, and engage in acquisitions even when there is no synergy.
The existing empirical evidence has not been able to clearly distinguish among
the different motives. For example, Bradley, Desai, and Kim (1988) argue that
takeovers are value increasing transactions because total gains are positive in their
sample of takeovers. However, the returns to acquiring firm stockholders are
negative for about half the cases, and the average return is also negative, at least
in the 1980s.1 Since synergy motive implies that acquisitions take place only if
there are gains to acquirer shareholders, this finding suggests that hubris or agency
*School of Business
Administration,Universityof Michigan, Ann Arbor,MI 48109-1234. The
authorsare gratefulto Yoon Choi, Kyuho Whang, Myeong-KyunKim, and Marc Lipson for research
assistanceandto KenLehnfor supplyingthe 1985-1988 data. The authorsthankCliffordBall, Michael
Bradley,Susan Chaplinsky,HarryDeAngelo, Ronen Israel,GautamKaul,E. Han Kim, GregNeihaus,
andNejatSeyhunfor helpfuldiscussionsandcommentson earlierdrafts. The authorsalso thankJFQA
ManagingEditor Paul Malatestaand an anonymousJFQA referee for detailed comments that have
substantiallyenhancedthe paper.Financialassistancefromthe MichiganBusiness School is gratefully
acknowledged.The authorstake responsibilityfor any remainingerrors.
1In the
sample of 330 tenderoffers, the averageacquirergain is ? $10 million. Also, in 49 percent
ofthe takeoversin the sampleandin 42 percentof Asquith's(1983) sample,acquirergains arenegative.
347

348 Journal of Financial and Quantitative Analysis
may be the dominant factor. There is ample empirical evidence that is consistent
with this observation. Malatesta (1983) finds that mergers are value increasing
transactions for target firms but value decreasing transactions for acquiring firms
and concludes that takeovers are motivated by agency. Walkling and Long (1984)
find that the existence or absence of managerial resistance to a takeover bid is
directly related to the target management's personal wealth changes due to the
takeover. Lewellen, Loderer, and Rosenfeld (1985) find that acquirer returns from
acquisitions are positively related to the level of management ownership in the
acquiring firm. Lang, Stulz, and Walkling (1989) show that acquirer returns are
positively related to its Tobin's Q, which is a proxy for the quality of the acquirer
management. Morck, Shleifer, and Vishny (1990) find that acquisitions driven by
diversification and growth motives result in lower acquirer returns. Seyhun (1990)
finds that managements of bidding firms purchase more shares of their own firm
when the stock price reaction to the takeover announcement is large and positive
than when it is large and negative. Firth (1980), using a sample of U.K. takeovers,
finds evidence that is consistent with the hubris hypothesis.
The existing empirical work on the motives of takeovers is inconclusive
probably due to the simultaneous existence of all three motives in any sample
of takeovers. This problem is overcome by investigating the relation between tar?
get and total gains instead of depending on average gains as in the previous studies.
The three motives have different implications for the relation between target and
total gains. In a synergy motivated takeover, the target obtains part ofthe synergy
if it can threaten to resist the takeover or if there is competition among potential
acquirers. In this case, it can be shown that the higher the synergy, the higher the
target gain, everything else remaining the same.2 Hence, one would expect the
target and total gains to be positively correlated in synergy motivated takeovers.
Conversely, suppose a takeover is motivated by acquirer management's self-
interest and enables the management to extract wealth from shareholders. For
example, management might acquire firms that enhance the dependence of the
firm on their own skills even though such an acquisition might reduce the value of
the firm (see Shleifer and Vishny (1989)). Therefore, in such takeovers, there are
negative total gains and negative gains to acquirer shareholders. If target share?
holders realize the management's motives, they will attempt to appropriate some
of the management's rent and will succeed in doing so if they have some bargain-
ing power. The greater the management's rent, the more the target shareholders
can appropriate. Since the management's rent reduces total value to shareholders,
total gain to shareholders is inversely related to the rent. This implies that the
correlation between target and total gains is negative.
The hubris hypothesis maintains that there are no gains from takeovers and
that takeovers occur because acquirer managers make mistakes in estimating gains.
Since target gains are merely a transfer of wealth from acquirers, there will be zero
correlation between target and total gains.
The correspondingnumbersreportedby Bradley,Desai, andKim (1988), andMandelker(1974) are53
percentand 54 percent,respectively. See Jensenand Ruback(1983) for a surveyof empiricalevidence
on gains from acquisitions. Jarrelland Poulsen (1989) find that acquirerreturnsare lower duringthe
1980s comparedto the 1960s and 1970s.
2See Berkovitch and Khanna (1990), Berkovitch and Narayanan(1990), Fishman (1989), and
Shleifer and Vishny (1986).

Berkovitch and Narayanan 349
Using a data base of 330 tender offers made during 1963-1988, the synergy
and agency motives controlling for the effect of hubris are first compared. This
is achieved by looking at the correlation between target and total gains. The
total gain is unaffected by any overpayment by the acquirer management since the
acquirer's loss due to overpayment is fully offset by the target's gain. Therefore, the
relation between target and total gains is unaffected by hubris, unlike the relation
between target and acquirer gains. It is found that while the correlation between
target and total gains is positive for the entire sample (suggesting that synergy is a
stronger motive than agency), there is a big difference in the correlation between
subsamples of positive and negative total gain. In the subsample of positive total
gain, the correlation is positive, while in the subsample of negative total gain, the
correlation is negative (i.e., the higher the total gain, the smaller the target gains).
This suggests that the agency motive dominates in the negative total gain subsample
while the synergy motive dominates in the positive total gain subsample.
Strong evidence of hubris is also found, at least in the positive total gain
subsample. In this subsample, the correlation between target and acquirer gains is
not significantly different from zero. If synergy were the only motive, a positive
correlation should be seen between target and acquirer gains. One possible reason
that the correlation is not significantly different from zero is the presence of hubris.
Since hubris implies a negative correlation between target and acquirer gains, its
effect counters the effect of synergy.
It is found that the signs of the correlations between target, acquirer, and
total gains are independent of the number of bidders for the target. As expected,
for the positive total gain subsample, total gain increases with competition. For
the negative total gain subsample, however, total gain decreases with competition.
This surprising result indicates that competition is motivated by agency in this
subsample, and the winner is the bidder management who can extract the most
from its shareholders.
The paper is organized as follows. Section II describes the various motives
for takeovers and their respective implications for the relation between target and
total gains. Section III derives the hypotheses. Section IV describes the data and
the methodology used to estimate the gains from the takeover. Section V provides
the empirical results and Section VI concludes the paper.
II. Motives for Takeovers
This section reviews the three takeover motives and their implications for the
relationship among measured total gains, target gains, and acquirer gains. Most
of the existing literature that investigates the motives behind takeovers looks at
average gains (see, for example, Malatesta (1983), Roll (1986), or Bradley, Desai,
and Kim (1988)). In contrast, this paper derives implications of the different
takeover motives to the correlations between target and total gains and between
target and acquirer gains. This provides a different method of distinguishing
among the competing motives. Subsection A reviews the three motives and their
implications, while Subsection B discusses the impact of measurement errors.

A. Review of Motives
1. The Synergy Motive

The synergy motive assumes that managers of targets and acquirers maximize
shareholder wealth and would engage in takeover activity only if it results in gains
to both sets of shareholders. Therefore, it follows that the measured gains to
both target and acquirer shareholders would be positive. If the target has some
bargaining power, either because it can resist the acquirer or because there is
competition among potential acquirers for the target, then the target gain increases
with the total gain. For example, this occurs if the outcome of the bargaining is
that the target receives any fixed fraction of the total gain. Thus, if takeovers are
motivated by synergy, gains to the target and the acquirer, and the total gain, will
be positive and positively correlated with each other.
2. The Agency Motive
It has been suggested that some takeovers are primarily motivated by the
self-interest of the acquirer management. Several reasons have been advanced to
explain this divergence. Among them are diversification of management's personal
portfolio (Amihud and Lev (1981)), use of free cash flow to increase the size of
the firm (Jensen (1986)), and acquiring assets that increase the firm's dependence
on the management (Shleifer and Vishny (1989)). The basic idea in most of these
explanations is that acquisitions result in the extraction of value from the acquirer
shareholders by acquirer management. For example, "specialist" managements
acquire firms in their own lines of business so that the success of the combined
entity will depend even more on their specific skills. The management can exploit
this dependency to increase perquisite consumption or defeat rivals who are better
than itself in running some ofthe operations ofthe firm. Such management actions
result in agency costs that reduce the total value of the combined firm available to
shareholders.
The important aspect ofthe above argument for this analysis is that the target
firm has been identified by the acquirer management as one that is most suited
to increase its own welfare. Therefore, target shareholders, realizing their value
to the acquirer management, will attempt to obtain some of this value. To the
extent that target shareholders have some bargaining power, they will succeed in
doing so, and the value they obtain will increase with the amount that the acquirer
management can appropriate.3 Therefore, the more severe the agency problem,
the higher the target gain. Since greater appropriation by acquirer management
also results in lower total gain, there is an inverse relation between total and target
gains. Moreover, since the acquirer gains are inversely related to the severity of
the agency problem, the target and acquirer gains are also negatively correlated.
3. The Hubris Hypothesis

The hubris hypothesis maintains that acquisitions are motivated by managers'
mistakes and that there are no synergy gains. Suppose the bidder management is
3As stated in the analysis of the synergy motive, this occurs when the payoff to each partyis any
fixed proportionof the value to be divided.

equally likely to overestimate as underestimate the synergy. It engages in takeovers

only when it overestimates. Since the synergy is presumed to be zero, the payment
to the target represents a transfer between the target and the acquirer. It follows
that the higher the target gain, the lower the bidder gain, and that the total gain is
zero. Therefore, while the target and acquirer gains are negatively correlated, the
target and total gains are uncorrelated.
If the hubris hypothesis holds in its strictest form, one should not observe
positive total gains in takeovers. However, there is evidence that takeovers on
average result in positive total gains (see Table 2, Panel A). As Roll (1986) suggests,
this can be explained if there are true synergies in some takeovers but managers
still make valuation errors. With respect to the relation between target and total
gains, this scenario is similar to a takeover motivated by synergy but where there
are measurement errors (instead of managerial errors). Therefore, the predictions
of these two hypotheses regarding the correlation between target and total gains are
the same. However, the relation between target and acquirer gains is ambiguous.
This is because the synergy motive results in a positive correlation between target
and acquirer gains, while hubris results in a negative correlation.
B. The Effect of Measurement Errors
If all takeovers were motivated by synergy alone, one would never observe
negative gains; similarly, if all takeovers were motivated by agency alone, one
would never observe positive gains. However, the data show that acquirer gains
are negative in about one-half of the takeovers while total gains are negative in
about 25 percent of the takeovers. One possible reason why both positive and
negative gains are observed (even if only one of the two hypotheses holds) is
that the measurement of gains is subject to error. Typically, gains (defined as
gains to stockholders of the firms) are measured by calculating the abnormal stock
returns at the announcement of the acquisition. Several types of errors can arise
in such a measurement. For example, precise identification of the exact time of
"announcement" of the acquisition is difficult. Most studies rely on Wall Street
Journal announcements even though the news of the takeover might have leaked out
earlier. Another source of error is the simultaneous arrival of unrelated news about
the firms involved in the takeover. Finally, the market model used for estimation
is also subject to errors.
In order to derive a testable hypothesis for the synergy motive, it is assumed
that the distribution of measurement errors is independent of the true synergy
gains. In this case, lower measured gains are more likely if the true synergies
are lower, while higher measured gains are more likely if the true synergies are
higher.4 Therefore, even in the presence of measurement errors, the synergy motive
predicts positive correlation between all measured gains. Similarly, in the presence
of measurement errors, the agency motive predicts negative correlation between
target and total gains, and between target and acquirer gains.
4SupposeS is the true synergy and it is observedthaty = S + e, where ? is i.i.d. with zero mean.
Then the higherthe observedsynergyy, the higherthe probabilitythatthe true synergyS is higher.

III. The Hypotheses
The three motives discussed in the previous section posit different relations
between observed target and total gains, and between observed target and acquirer
gains. The relations are summarized in Table 1. It can be seen from the table
that the synergy hypothesis predicts a positive correlation between target and total
gains while the hubris and agency hypotheses predict zero and negative correla?
tion, respectively. Similarly, the synergy hypothesis predicts a positive correlation
between target and acquirer gains while the hubris and agency hypotheses predict
a negative correlation.
TABLE1
Summary of the Implications of Different Hypotheses Regarding the Relation between
Target Gain and Total and Acquirer Gains
It is quite likely that all three motives are simultaneously present in a sample
of takeovers. Therefore, to better distinguish among the different hypotheses, the
following tests are suggested. First, the synergy hypothesis is compared with the
agency hypothesis without the potentially confounding effect of hubris. The effect
of hubris, if any, is eliminated by considering the correlation between target and
total gains instead of considering the correlation between target and acquirer gains.
Since the hubris hypothesis implies that a dollar gain to the acquirer is a dollar loss
to the target, it implies that target and total gains are uncorrelated. Therefore, the
relation between target and total gains is uncontaminated by the effect of hubris.
A simple test to distinguish between the synergy and agency hypotheses is
to measure the sign of the correlation between target and total gains. Such a test
may not resolve the issue if both motives are present in the sample. Since synergy
and agency motives have opposite predictions, the results of such a test may either
reflect the stronger ofthe two effects, or may show zero correlation between target
and total gains because the two effects cancel each other. In the latter case, it may
be erroneously concluded that the results are consistent with the hubris hypothesis.
To avoid this problem, the following test is used. Since the agency motive,
if it exists, is more likely to be present in takeovers with negative total gains than
in takeovers with positive total gains, the sample is divided into takeovers with
positive and negative total gains, and the correlation is measured between target
and total gains, and between target and acquirer gains, within each sample. The
hypotheses then would be:
(Hl): Takeovers are primarily motivated by synergy. Therefore, target and total
gains will be positively correlated in takeovers with positive measured total gains
as well as in takeovers with negative measured total gains.

(H2): Takeovers are primarily motivated by agency. Therefore, target and total
gains will be negatively correlated in takeovers with positive measured total gains
as well as in takeovers with negative measured total gains.
(H3): Takeovers with positive measured total gains are motivated primarily by syn?
ergy and takeovers with negative measured total gains are motivated primarily by
agency. Therefore, the target and total gains are positively correlated in takeovers
with positive measured total gains and negatively correlated in takeovers with
negative measured total gains.
Next, an attempt is made to identify the importance of hubris. Hubris may

exist even if the primary motive for the takeover is synergy or agency. However, it
has different effects on the measured correlation between target and acquirer gains
depending on whether the primary motive is synergy or agency. Since hubris
implies a negative correlation between target and acquirer gains, it reinforces
the effect of agency (which also implies a negative correlation between target
and acquirer gains) but mitigates the effect of synergy (which implies a positive
correlation between target and acquirer gains). Therefore, if the sample is split
into takeovers with positive and negative total gains, under the assumption that
agency is the primary motive in takeovers with negative total gains and synergy is
the primary motive in takeovers with positive total gains, the following hypotheses
are obtained in the absence of hubris:
(H4): Target and acquirer gains are negatively correlated in the subsample of
negative total gains.
(H5): Target and acquirer gains are positively correlated in the subsample of
positive total gains.
IV. Data and Estimation of Gains
The method used here to estimate the target and total gains is derived from
Bradley, Desai, and Kim (1988). The data consist of successful tender offers from
1963 through 1988.5 From these data, the sample is selected based on the following
considerations: 1) The shares of both the acquirer and the target were traded on
the New York Stock Exchange or the American Stock Exchange, 2) the price
and/or number of shares outstanding is available for each of the six days before
the event date, and 3) sufficient daily stock return data is available to estimate the
market model. The first criterion enables use of CRSP daily stock return data to
compute the gain. The last two restrictions enable estimation of the market model
and computation of the Cumulative Abnormal Returns (CAR) of the target and
acquirer upon announcement of a takeover attempt. These restrictions reduced the
initial sample to 330 tender offers.
Target and acquirer gains are defined, respectively, as the sum of the change
in wealth of the shareholders of the target and acquiring firms. Total gain is defined
as the sum of target and acquirer gains. The estimates of the change in shareholder
5The data for the
years 1963-1984 are from the databaseof Michael Bradley,and for the years
1985-1988 were suppliedby the Office of the Economic Analysis of the SEC.

wealth are based on market model prediction errors. Market model estimates for
each target firm were obtained using a maximum of 240 trading days of daily
returns data beginning 300 days before the announcement of the first tender bid
by the first bidder. Corresponding estimates for the acquiring firms were based
on 240 trading days of daily returns data beginning 300 days before the first bid
is made by this firm. Note that the estimation window could be different for the
target and the acquirer if there are multiple bidders and the successful bidder is
not the first bidder.
The C AR is calculated for each target and acquirer in the sample for a window
defined below. For target firms, the CAR is computed from five days before the
announcement of the first bid for the target (not necessarily by the ultimately
successful bidder) through five days after the announcement of the successful
bid.6 In the case of tender offers where there is only one bid, the window over
which the CAR is calculated is 11 days. In the case of tender offers with multiple
bids, the window length is variable and depends on the number of bids and the
interval between bids.7 For acquiring firms, the event window is from five days
before the announcement of the first bid by that acquirer till five days after the
announcement of the final bid by the same acquirer. Again, the window length
is 11 days in the case of tender offers with only one bid, and longer if there are
multiple bids, either by the successful bidder or by other bidders.
The target gain is computed by multiplying the target's CAR by the market
value of the target firm's equity as of the end of six trading days prior to the
first announcement for the target, minus the value of the target shares held by the
acquirer. The acquirer gain is computed by multiplying the acquirer's CAR by the
market value of the acquiring firm as of the end of six trading days prior to the first
announcement made by the acquiring firm. The total gain is the sum of the target
and acquirer gains.
V. Results
A. Testing the Hypotheses
Panel A of Table 2 provides the estimates of the target and acquirer gains
for the sample of 330 tender offers. It can be seen from the table that the mean
target gain is $130 million and the mean acquirer gain is ?$10 million.8 In 49.4
percent of the cases, acquirers obtained positive gains, while in 95.8 percent of
the cases, target gains were positive. The total gain was positive in 76.4 percent
ofthe cases. This suggests that about three-fourths ofthe takeovers are motivated
by synergy and the rest by agency and/or hubris. In 63.9 percent of acquisitions
with positive total gains, the acquirer gains were positive. From the subsample
6Ideally,the window should be extendedto the date the tenderoffer is executed. However,reliable
execution dates are not availablefor most of the offers in the sample.
7For example, suppose bidderA bids on date t, followed by bidder B on date (t + s), who wins.
Then, the window for the targetstartson (t ? 5) and ends on (t + s + 5), a total of (s + 10) days.
8Malatesta(1983) reportsa risk-adjustedaverageloss of $27.65 million to acquiringfirms'stock?
holders over a period of five months ending with the announcementof the merger approval. This
paper'sestimate is differentprobablybecause of the shorterwindow over which abnormalreturnsare
measured.

of negative total gains it can be seen that loss from takeovers may be large (mean
total loss of $146.5 million).
The data include tender offers during 1963-1988 if both the bidder and the target are listed
on the New York Stock Exchange or the American Stock Exchange. Panel A provides the
summary statistics of the entire sample of 330 tender offers. Panel B provides the summary
statistics of the tender offers where there was only one bid. Panel C provides the summary
statistics of the tender offers where there were multiple bids either from the same bidder
or from different bidders. In each panel, summary statistics of subsamples of tender offers
with positive total gains and negative total gains are shown. The gains are stated in millions
of 1984 dollars.
Panel A of Table 3 provides the results of the regression, target gain = a + (5

(total gain), for the entire sample as well as for subsamples of positive and negative
total gain. For the entire sample, the correlation between target and total gains
is positive and significant: the estimate of (5 is 0.5445 (t = 3.505). While this is
consistent with the synergy hypothesis, the positive correlation between total and
target gains does not hold uniformly across the sample. There is a big difference
in the correlation between the positive total gain subsample and the negative total

gain subsample. For the sample of positive total gains, the estimate of (3 is 0.649
(t = 3.651), while for the sample of negative total gains, it is -0.22 (t = -2.898).9
Both estimates are significant. These results support the hypotheses that synergy
is the primary motive for takeovers in the positive total gain subsample, while
agency is the primary motive in the negative total gain subsample (Hypothesis
(H3)). Specifically, the negative sign on the /3 estimate for the sample of negative
total gains and the positive sign on the /3 estimate for the sample of positive total
gains is inconsistent with the hubris hypothesis, which suggests that there is no
correlation between target and total gains.
Target gain is regressed against total gain in Panel A and against acquirer gain in Panel B.
Target gain is measured over a variable window starting five days before the first bid
and ending five days after the successful bid. Acquirer gain is measured over a window
starting five days before the first bid by that acquirer and ending five days after the final
bid by the same acquirer. Total gain is the sum of target and acquirer gains. In each
panel, coefficients are estimated for the entire sample and the subsamples of positive total
gains and negative total gains. The numbers in parentheses are White's heteroskedasticity-
consistent f-statistics. a is expressed in millions of 1984 dollars.
Panel B of Table 3 provides the results of the regression between target and
acquirer gains for the entire sample as well as for subsamples of positive and neg?
ative total gain. For the entire sample, the correlation between target and acquirer
gains is negative, though not significantly different from zero. This appears to
support the hubris hypothesis. However, there are clear differences in the corre?
lation between target and acquirer gains across the subsamples of positive total
gain and negative total gain. For the sample of positive total gains, the estimate
of (3 is -0.095 (t = -1.131), while for the sample of negative gains, it is -0.220
(t = -5.843). In other words, the correlation between target and acquirer gains
is significantly different from zero only in the negative total gains sample. This
9Since the datainvolve substantialdifferencesin magnitude,the assumptionof homoskedasticityis

not very plausible. White's (1980) test for heteroskedasticityconfirmsthis. Therefore,all the reported
f-statisticsare calculatedusing White's heteroskedasticity-consistentestimators.

implies that Hypothesis (H4) cannot be rejected, but, since both agency and hubris
result in negative correlation between target and acquirer gains, it cannot be con?
cluded whether hubris is present or not. However, the results do not support
Hypothesis (H5). The correlation between target and acquirer gains is opposite
that predicted by the synergy hypothesis even though the estimate is not significant.
This suggests that managerial hubris might be present in many of the takeovers in
the sample.
From Panel A of Table 3 where target gain is regressed against total gain,
it can be seen that a is not significantly different from zero for both subsamples.
This result is consistent with both synergy and agency hypotheses but not with the
hubris hypothesis. Under the synergy hypothesis, the target gain should be zero
when the total gain is zero. Under the agency hypothesis, when the total gain is
zero, there is very little or no agency problem and, hence, the target gain must be
close to zero. On the other hand, under the hubris hypothesis, one would expect
the target gain to be positive even if the total gain is zero. However, in Panel B
of Table 3, where target gain is regressed against acquirer gain, the intercept a is
significantly positive in the positive gain subsample, but not significantly different
from zero in the negative gain subsample. This is consistent with the existence of
hubris in the former sample and the absence of hubris in the latter. Therefore, the
intercept confirms the presence of hubris when synergy is the primary motive. It
also supports the view that the negative acquirer gains are primarily due to agency
and not due to hubris.
B. Effect of Competition
It has been shown (see Bradley, Desai, and Kim (1988)) that the division of
gains in takeovers is affected by the number of bidders. Competition is sometimes
explicit with more than one bidder vying for the target. In other cases, competition
takes the form of target resistance with the implication that the target can find
better offers elsewhere. In this case, there may be multiple bids by the same
bidder. Therefore, to test the effect of competition, the sample was divided into
two groups depending on whether there were one or more bids.10 It can be seen
from Panel B of Table 2 that single-bid takeovers make up more than 60 percent
of the sample (202 out of 330). In acquisitions involving only one bid, about 75
percent (151 out of 202) resulted in positive total gains. Panel C of Table 2 shows
that, of the 128 cases involving multiple bids, about 79 percent (101 out of 128)
resulted in positive total gains. As one would expect, the average target gain is
higher when there are multiple bids (mean target gain of $207 million compared
to $82 million in the case of single bids) and the difference is significant at the
1-percent level. In the positive total gain subsample, the mean total gain is $277
million in the case of multiple bids as opposed to $153 million in the case of
single bids, and the difference is significant at the 10-percent level. One reason
why the total gain is higher when there is competition is that there is not only
common value in takeovers but also significant private value. It is also possible
that higher potential gains attract more bidders. The additional gains generated by
10Thissimple classificationis used to proxy competitionsince most of the multiple-bidtakeovers

involved only two bids.

competition, however, are captured entirely by the targets. The differences in mean
acquirer gains between the single- and multiple-bid samples are not significant.
The increase in total gain in the case of multiple bids cannot be explained by
the hubris hypothesis. In the case of multiple bids, the hubris hypothesis implies
that the bidder who makes the bigger error will win. This, in turn, implies that
target gain will be higher in the case of multiple bids, but since these gains are
offset by acquirer losses, total gain will not increase.
When total gains are negative, the total loss and the acquirer loss are greater
in the multiple-bid sample than in the single-bid sample ($273 million versus $80
million for the total loss and $348 million versus $115 million for the acquirer
loss). Target gains are higher in the multiple-bid sample ($75 million versus $36
* That total and
million).1 acquirer gains are decreasing (or at least, nonincreasing)
with competition is consistent with the agency hypothesis. The bidder whose
management can appropriate the most wealth from its stockholders is likely to win
since it can pay the most for the target. That acquirer gains are decreasing with
competition is consistent with the hubris hypothesis; that total gains are decreasing
with competition, though, is not.
The regression results for the subsamples of single and multiple bids are given
in Table 4.12 The results for the positive total gains subsamples are qualitatively
similar to those of Table 3. The estimates of /3 are significant in both single- and
multiple-bid cases and have the correct signs. Not surprisingly, the estimate of (3
for the multiple-bid case (0.823) is greater than that for the single-bid case (0.439).
In the case of negative total gains, the estimate of (3 is insignificant (t = -1.364)
in the single-bid subsample even though its sign is consistent with the agency
hypothesis. For the multiple-bid subsample, the estimate of /3 is negative and
significant (t = ?2.654). This result supports the agency hypothesis. These
results are consistent with the hypothesis that the relation between target and total
gains predicted by the agency hypothesis must be stronger in the case of multiple
bids.
C. Cash Tender Offers
Since there is ample evidence that issuance of stock is considered bad news,
it has been suggested that the use of stock to finance takeovers is the cause of
negative acquirer returns. Asquith, Bruner, and Mullins (1987), Franks, Harris,
and Meyer (1988), and Travlos (1987) find evidence that supports this hypothesis.
Berkovitch and Narayanan (1990), Eckbo, Giammarino, and Heinkel (1990), and
Fishman (1989) show that, when there is informational asymmetry between the
bidder and the target, high-synergy bidders use cash and low-synergy bidders use
securities to finance the takeover. Therefore, the revelation that the medium of
exchange is cash will result in positive acquirer (and target) returns while the
opposite will hold if the medium of exchange is stock.
1'The differencesare not
statisticallysignificant.
12Theresultsof the regressionbetween targetand acquirergains in the case of single- and multiple-
bid acquisitionsare not reportedfor the sake of brevity. The results are qualitativelysimilar to that
reportedfor the entire sample in Panel B of Table 3.

TABLE4
Results of Regression: Target Gain = a + (3 (Total Gain)
for Single- and Multiple-BidAcquisitions
Sample Size a (3 R2
0.4298
0.0986
0.7694
0.6193
Panel A provides coefficient estimates from regressing target gain against total gain for
single-bid acquisitions and Panel B provides the same for multiple-bid acquisitions. Target
gain is measured over a variable window starting five days before the first bid and ending
five days after the successful bid. Acquirer gain is measured over a window starting
five days before the first bid by that acquirer and ending five days after the final bid by
the same acquirer. Total gain is the sum of target and acquirer gains. In each panel,
coefficients are estimated for the subsamples of positive total gains and negative total
gains. The numbers in parentheses are White's heteroskedasticity-consistent f-statistics.
a is expressed in millions of 1984 dollars
Since this paper's sample of takeovers consists only of tender offers, the
medium of exchange is mostly cash. Therefore, the medium of exchange is unlikely
to drive the results in this sample. However, to completely isolate the effect of
the medium of exchange, the same tests were conducted on a sample of takeovers
where cash was the medium of exchange.
Of the initial sample of 330 offers, 295 cases were cash-only transactions,
and for 24 percent (72 of 295) of these, estimated total gains were negative. This
is no different from the percentage of negative total gains in the initial sample of
330. The signs of the estimates of f3 are consistent with the synergy hypothesis
for positive total gain sample and the agency hypothesis for the negative total gain
sample. It was also found that, when the medium of exchange is restricted to cash,
the results are stronger for single-bid acquisitions. These results suggest that the
medium of exchange is not the cause of negative acquirer gains.
D. Robustness of Results
Since the gains in this sample range from a few million dollars to a few billion
dollars, it raises the concern that these results may be driven by a few outliers. For
example, in the negative total gain subsample (Table 2) the maximum total gain is
? 1.2 million dollars while the minimum total
gain is ?2367 million dollars. To
test the robustness ofthe results, the data were checked for influential observations.
Using the covariance ratio test, the influential observations were identified in the
entire sample and in each of the subsamples.13 In all, 17 influential observations
13Both the /?-studenttest and the hat matrix
leveragepoint test provideresultsgenerallyconsistent
with the covarianceratio test. The two biggest influentialobservationswith negative total gains are

were identified. These observations were removed from the sample and all the
regressions between the target gain and total gain were repeated.14 The results are
reported in Table 5. As can be seen from this table, the results are robust in all cases
except for the single-bid, negative total gain subsample. In this subsample, the
slope coefficient for the single-bid, negative total gain subsample is not statistically
different from zero, while the intercept term is significantly positive. In other
words, the target gain is independent of the total gain, which is the loss in value
due to agency. Since target gain increases with the value loss only if the target
has bargaining power relative to bidder management, this result implies that the
target has low bargaining power when there is only one bidder. This and the result
that the slope coefficient is significantly negative in the multiple-bid, negative total
gain subsample imply that the target derives its bargaining power more from the
competition among bidders than from its own potential to resist.
TABLE5
Results of Regression: Target Gain = a + (3 (Total Gain) without InfluentialObservations
Sample Size a (3 R2
Total Sample 241
Positive Total Gain
Total Sample 72
Negative Total Gain
Single Bids 146
Positive Total Gain
Single Bids 48
Negative Total Gain
Multiple Bids 95
Positive Total Gain
Multiple Bids 24
Negative Total Gain
Seventeen influential observations, identified using the covariance ratio test, are removed
from the sample of 330 tender offers and the tests of Tables 3 and 4 are repeated. The num?
bers in parentheses are White's heteroskedasticity-consistent f-statistics. a is expressed
in millions of dollars.
VI. Conclusions
This paper develops tests to distinguish among the three major motives for
takeovers: synergy, agency, and hubris. While other papers have used average
gains to distinguish among these motives, this paper uses the correlation among
target, acquirer, and total gains. It shows that the synergy hypothesis implies
positive correlation between target and total gains, the agency hypothesis implies
a negative correlation, and the hubris hypothesis implies zero correlation. Using
EastmanKodak's 1988 takeoverof SterlingDrug(total gain of ?$ 2.37 billion and targetgain of $741
million) and AT&T's 1988 takeoverof ParadyneCorporation(total gain of ?$ 1.43 billion and target
gain of $6.7 million). Both takeoversinvolved multiplebids and were cash offers.
14Theregressionswere also repeatedby removingfrom each subsampleonly the influentialobser?
vations of that subsample. The resultsare identical.

a sample of tender offers during 1963-1988, these hypotheses were tested for the
entire sample, and for the subsamples of positive and negative total gains. The
analysis yields several interesting results. It was found that, on average, takeovers
yield positive total gains. This occurs in about 75 percent of the takeovers in the
sample. In the subsample of positive total gains, the correlation between target
and total gains is positive, indicating that the synergy motive dominates. In the
subsample of negative total gains, the correlation is negative, indicating that the
dominating motive is agency. There is evidence that hubris exists, at least in the
positive total gain subsample.
It was also found that in takeovers with positive total gains, the total gain in?
creases with competition for the target. In takeovers with negative total gains, the
total gains decrease with competition. This implies that, in this sample, competi?
tion is motivated by agency rather than by true synergy and (perhaps surprisingly)
that competition will not eliminate agency problems when they exist but only
aggravates them.
In summary, while synergy is the reason for the majority of the takeovers,
there is strong evidence that many takeovers are motivated by agency and hubris.
However, agency, not hubris, seems to be the major reason for the existence of
value-reducing acquisitions.

References
Amihud, Y., and B. Lev. "Risk Reductionas a ManagerialMotive for ConglomerateMergers."Bell

Journal of Economics, 12 (Autumn 1981), 605-617.
Asquith,P. "MergerBids, Uncertainty,and StockholderReturns."Journalof Financial Economics, 11
(April 1983), 51-83.
Asquith,R; R. Bruner;and D. Mullins. "MergerReturnsand the Formof Financing."WorkingPaper,
HarvardUniv. (1987).
BerkovitchE., and N. Khanna. "How TargetShareholdersBenefit from Value-ReducingDefensive
Strategiesin Takeovers."Journal of Finance, 45 (March 1990), 137-156.
Berkovitch,E., and M. R Narayanan."Competitionand Mediumof Exchange in Takeovers."Review
of Financial Studies, 3 (No. 2, 1990), 153-174.
Bradley, M.; A. Desai; and E. H. Kim. "SynergisticGains from CorporateAcquisitions and Their
Divisionbetweenthe Stockholdersof TargetandAcquiringFirms."Journalof FinancialEconomics,
21 (May 1988), 3-40.
Eckbo, E.; R. Giammarino;and R. Heinkel. "AsymmetricInformationand the Mediumof Exchange
in Takeovers:Theory and Tests."Review of Financial Studies, 3 (No. 3, 1990), 651-676.
Firth, M. "Takeovers,ShareholderReturnsand the Theory of the Firm." QuarterlyJournal of Eco?
nomics, 94 (March 1980), 235-260.
Fishman,M. "PreemptiveBidding and the Role ofthe Mediumof Exchangein Acquisitions."Journal
of Finance, 44 (March 1989), 41-58.
Franks,J.; R. Harris;and C. Meyer. "Meansof Paymentin Takeovers:Results for the U.K. and U.S."
In CorporateTakeovers: Causes and Consequences, A. J. Auerbach,ed. Chicago, IL: Univ. of
Chicago Press (1988).
Jarrell,G., and A. Poulsen. "The Returnsto AcquiringFirms in TenderOffers: Evidence from Three
Decades." Financial Management,18 (Autumn 1989), 12-19.
Jensen,M. "AgencyCost of Free CashFlow, CorporateFinance,andTakeovers."AmericanEconomic
ReviewProceedings, 76 (May 1986), 323-329.
JensenM., andW.Meckling. "Theoryofthe Firm: ManagerialBehavior,Agency Costs andOwnership
Structure."Journal of Financial Economics, 3 (Oct. 1976), 305-360.
Jensen,M., and R. Ruback. "TheMarketfor CorporateControl:The Scientific Evidence."Journal of
Financial Economics, 11 (April 1983), 5-50.
Lang,L.; R. Stulz; andR. Walkling. "Tobin'sQ andthe GainsfromSuccessful TenderOffers."Journal
of Financial Economics, 24 (Sept. 1989), 137-154.
Lewellen, W.; C. Loderer;and A. Rosenfeld. "MergerDecisions and Executive Stock Ownershipin
AcquiringFirms."Journal of Accountingand Economics,1 (April 1985), 209-231.
Malatesta,R "TheWealthEffect of MergerActivity and the ObjectiveFunctionsof MergingFirms."
Journal of Financial Economics, 11 (April 1983), 155-181.
Mandelker,G. "Risk and Return: The Case of Merging Firms." Journal of Financial Economics, 1
(Dec. 1974), 303-335.
Morck,R.; A. Shleifer;and R. Vishny. "Do ManagerialObjectivesDrive Bad Acquisitions?"Journal
of Finance, 45 (March 1990), 31-48.
Roll, R. "TheHubrisHypothesisof CorporateControl."Journalof Business, 59 (April 1986), 197-216.
Seyhun, N. "Do BidderManagersKnowinglyPay Too Much for TargetFirms?"Journal of Business,
63 (Oct. 1990),439^t64.
Shleifer,A., and R. Vishny. "Greenmail,White Knights,and Shareholders'Interest."RandJournalof
Economics, 17 (Autumn 1986), 293-309.
_"Managerial Entrenchment: The Case of Manager-SpecificInvestments."
Journal of Financial Economics, 25 (Nov. 1989), 123-139.
Smith,C. "InvestmentBankingandthe CapitalAcquisitionProcess."Journalof Financial Economics,
15 (Jan. 1986), 3-29.
Travlos, N. "CorporateTakeoverBids, Methods of Payment, and Bidding Firms' Stock Returns."
Journal of Finance, 42 (Sept. 1987), 943-964.
Walkling, R., and M. Long. "Agency Theory, ManagerialWelfare, and TakeoverBid Resistance."
RandJournal of Economics, 15 (Spring 1984), 54-68.
White, H. "A Heteroskedasticity-ConsistentCovarianceMatrixEstimatorand a Direct Test for Het?
eroskedasticity."Econometrica,48 (May 1980), 817-838.


Cambridge University Press University of Washington School of Business Administration

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cambridge University Press University of Washington School of Business Administration

Uploaded by

Copyright:

Available Formats

Motives for Takeovers: An Empirical Investigation

Author(s): Elazar Berkovitch and M. P. Narayanan

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

Motives for Takeovers: An Empirical Investigation

Elazar Berkovitch and M. P. Narayanan*

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

II. Motives for Takeovers

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

1. The Synergy Motive

2. The Agency Motive

3. The Hubris Hypothesis

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

equally likely to overestimate as underestimate the synergy. It engages in takeovers

B. The Effect of Measurement Errors

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

III. The Hypotheses

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

Next, an attempt is made to identify the importance of hubris. Hubris may

IV. Data and Estimation of Gains

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

A. Testing the Hypotheses

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

Panel A of Table 3 provides the results of the regression, target gain = a + (5

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

9Since the datainvolve substantialdifferencesin magnitude,the assumptionof homoskedasticityis

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

10Thissimple classificationis used to proxy competitionsince most of the multiple-bidtakeovers

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

C. Cash Tender Offers

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

Amihud, Y., and B. Lev. "Risk Reductionas a ManagerialMotive for ConglomerateMergers."Bell

This content downloaded from 131.252.96.28 on Mon, 15 Sep 2014 14:29:14 PM

You might also like