Some Thoughts on the Market for Corporate Control

Abstract

The merger mania of the 1980s put top corporate management on the defensive as predators sought takeover targets. Hostile takeover activity has dissipated in recent years, for a variety of reasons, but the ethical issues surrounding acquisitions and mergers and the ethically questionable conduct that is often involved remain as relevant as ever. Most ethical discussions of acquisitions and mergers focus on the ethical conduct of the predator. The ethical conduct of the target company’s top management is often overlooked. This chapter reviews the ethical literature on hostile takeovers and applies ethical theory to some of the defensive tactics that have been used to thwart unwanted takeovers. The focus will be on the fiduciary duties of top management and ethical issues involved with poison pills, greenmail, golden parachutes and other defensive tactics. Both utilitarian and nonutilitarian approaches will be used as tools of analysis. It also reviews the attitude toward the market for corporate control that exists in 17 transition economies. There is much evidence to suggest that most acquisitions and mergers result in a net benefit to the economy (Easterbrook and Fischel 1981; Ginsburg and Robinson 1986; Halpern 1973; Jensen and Ruback 1983, 1985, 1988). There are more winners than losers. Economists would say that it is a positive-sum game. Yet those who initiate such activity, the “predators,” are commonly viewed as greedy, immoral, and uncaring. Greed may be a vice and viewed as an immoral character trait in some religious and philosophical circles. However, those who are greedy and who play within the rules by not resorting to theft, fraud, deception, or murder to achieve their goals actually perform a service for others. This idea is not new by any means. Adam Smith pointed it out in The Wealth of Nations in 1776. Those who have no intention of benefiting others often benefit them more than they know. They try to capture market share by either slashing prices or offering better quality products or services than the competition. Those who are obsessed with driving their competitors out of business by resorting to low prices and high-quality products and services do much more good