Anti-Takeover Provisions, Software Companies, and Value Creation

Abstract

Many high-tech companies adopt anti-takeover provisions (ATPs). This has been especially prevalent in the software industry. These companies argue that takeover protection is necessary to protect the company from ‘opportunistic’ takeover bids; and thus, to enable the company to focus on long-term innovation and value-creation. This has induced some regulators, such as the Ontario Securities Commission, to re-evaluate their restrictions on ATPs. Thus, I test if ATPs can encourage value-creating innovation in companies in the software industry (‘IT companies’, for short). I analyze the impact of ATPs on investments (acquisitions) made by IT companies. I find that Protected-IT companies, as marked by a preponderance of ATPs, make acquisitions that create more shareholder wealth (as proxied by acquirer returns and post-acquisition Tobin’s Qs) and are more likely to undertake acquisitions that increase innovation (as proxied by increases in R&D). This suggests that ATPs might be beneficial in high-tech companies.