Tirole 43-46 - Tirole 43-46 Takeovers & Leveraged...

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Explosion of hostile takeovers & LBOs in the US in 1980s In Europe, acquisitions are negotiated with management (see hostile takeovers as worst of American capitalism) From managerial side: o Takeovers may be needed to keep managers on their toes o But for other forms of incentive based on termination of employment, they may induce managers to boost short-term performance at expense of long- term On corporate policy front: o Takeovers put in place new managerial team with fresh ideas how to run a firm and less keen on sticking to former strategy mistakes o But takeovers let value-reducing raider gain control from uncoordinated shareholders Takeovers may shatter implicit contracts with stakeholders 3 salient features of US corporate environment 1980s: 1. o The size of hostile takeovers, wide media coverage, personality characteristics of participants and anxiety of managers high attention to takeovers 2. Many publicly traded firms were turned back private through LBO, especially management buyouts 3. Corporate leverage increased substantially during the decade Firms bought back own shares, sometimes put them into employee stock ownership plans New public debt was created (risky or junk bonds)
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Tirole 43-46 - Tirole 43-46 Takeovers & Leveraged...

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