(Authors: Max P. Leitterstorf and Maximillian M. Wachter)
Research Applied précis prepared by Thomas V. Schwarz, Black Forest, LLC
Does the presence of a blockholder (i.e., a shareholder controlling at least 25% of the voting rights) affect the strategic decision-making of a publicly traded firm? The authors begin by summarizing a large body of previous empirical and theoretical work that strongly suggests that it does, primarily by serving as a capable and effective monitor of the firm’s management and their self-serving behavior. This ‘agency cost’ has been suggested to be at the heart of the takeover price premium that bidding firms have long observed to pay in their firm acquisitions. Previous research has demonstrated that these takeover prices occur at a significant premium to the market stock price and that the premium cannot be explained by synergistic or other value creation rationale. In their first analysis, the authors confirm that bidders with blockholders offer lower takeover premiums than bidders without blockholders.
But does the type of blockholder owner matter? Several different blockholder groups exist including:
- private equity investors
- nonfinancial companies
The most common of these and the focus of this study is the controlling family blockholder. In particular, it is hypothesized that the family firm blockholder group assumes the role of family nurturer. Consequently, decisions tend to focus more on loss aversion, meaning that avoiding losses is more important that obtaining gains. Within this framework, the authors expected to observe lower takeover premiums for family controlled blockholder bidding firms.
And they do observe exactly that. The authors examine all takeover offers for publicly listed German firms between 2004 and 2014 resulting in 149 offers. One third of the bidders are ‘true’ family firms (not lone founder firms). Several control variables are included such as market capitalization, control before offer, target age, market to book ratio, stock performance, bidder age, business year, industry, and type of blockholder. Takeover premiums are measured as the price offered relative to the average stock price during the three months prior to the first announcement. Average premiums noted in previous research range from 24-30% in Europe and the U.S., respectively. In this study, the average size of takeover targets exceeds one billion euros. When blockholders are present, the takeover premium is 62% lower than when there is no blockholder (when shareholder structure is more diluted). Further, the reduction increases to 67% in the presence of a family CEO.
The major finding of the paper is that firms with ownership blockholders offer, on average, lower takeover premiums than firms without blockholders and that family blockholders offer significantly lower premiums than other types of blockholders. This finding is further reinforced if the CEO is also a member of the business-owning family. The explanation offered for this family effect is that family blockholders differ from non-family blockholders with regard to the manner in which they provide monitoring. Specifically, problem framing and loss aversion of family firms result in a cautious approach toward takeovers. Other observed family firm behaviors support this explanation. Families often have an insufficiently diversified wealth position and bankruptcy would destroy all non-economic values of ownership. Family firms have been shown to pursue significantly fewer socially or environmentally harmful activities than nonfamily firms, conduct more philanthropic activities, avoid downsizing and implement more care-orientated contracts for non-family managers. In addition, family firms have patient capital. These items are likely to result in a cautious approach toward takeovers that are characterized by their potentially extreme impact on business success.
As in all research, there are caveats and a need for further research and validation. Herein, the authors assume that takeover premiums represent overbidding by managers seeking their own empire building strategy to the detriment of shareholders. Firms that do not announce takeover bids are unknown and therefore not evaluated. Do family firms refrain more often from making a takeover offer than other types of firms? Are there additional motivations for takeover premiums? These questions and others need further research.
The primary practical implication of this paper is the evidence that the presence of blockholder groups makes a big difference in a major strategic decision of large firms: the takeover bid. When engaging with such firms, it is important for practitioners and family firms to know the power balance between management and owners. Blockholder concentration is important. And in the case of family firms, these blockholders have unique motivations and objectives that impact risk-taking propensity and bidding behavior. The presence of family blockholder groups should be noted as it may reduce entrepreneurial growth bidding behavior in favor of protecting existing value.
The interested reader is directed to the Introduction and Theoretical Background and Hypotheses sections of the paper for a more complete overview of prior research.
About the contributor
Thomas V. Schwarz is an FFI Fellow and is principal with Black Forest LLC. Tom can be reached at firstname.lastname@example.org.