THE TAKEOVER CONTROVERSY: ANALYSIS AND EVIDENCE
Michael C. Jensen
Harvard Business School MJensen@hbs.edu
Abstract The market for corporate control is fundamentally changing the corporate landscape. Transactions in this market in 1985 were at a record level of $180 billion. These transactions involve takeovers, mergers, and leveraged buyouts. Closely associated are corporate restructurings involving divestitures, spinoffs, and large stock repurchases for cash and debt. The changes associated with these control transactions are causing considerable controversy. Some argue that takeovers are damaging to the morale and productivity of organizations and are therefore damaging to the economy. Others argue that takeovers represent productive entrepreneurial activity that improves the control and management of assets and helps move assets to more productive uses. The controversy has been accompanied by strong pressure on regulators and legislatures to enact restrictions that would curb activity in the market for corporate control. In the spring of 1985 there were over 20 bills under consideration in Congress that proposed new restrictions on takeovers. Within the past several years the legislatures of New York, New Jersey, Maryland, Pennsylvania, Connecticut, Illinois, Kentucky, and Michigan has passed antitakeover laws. The Federal Reserve Board entered the fray early in 1986 when it issued its controversial new interpretation of margin rules that restricts the use of debt in society. This paper analyzes the controversy surrounding takeovers and provides both theory and evidence to explain the central phenomena at issue. The paper is organized as follows. Section 2 contains basic background analysis of the forces operating in the market for corporate control -- analysis which provides an understanding of the conflicts and issues surrounding takeovers and the effects of activities in this market. Section 3 discusses the conflict between managers and shareholders...