Historically, takeover battles have been viewed as simply a three-way contest involving bidders, target companies and shareholders. In the last Congress, we attempted to develop legislation to curb abuses in that three-way contest, and to make the contest itself more fair. But as we became more deeply involved in the issues, broader concerns were raised.
Corporate leaders, public officials, economists, shareholder groups and others are charging that takeover activity is having a very unhealthy impact on our economy. Therefore, our approach is not to focus on legislation to address specific abuses, but to conduct broad hearings on the impact of these transactions on the economy, on our capital markets and on shareholders and other corporate constituencies. We have involved hundreds of individuals, associations and experts in our review.
We embark on this effort, because we are told that the threat of corporate takeovers is forcing management to a short-term horizon, and that research and development and long-term capital investments are short-changed in an environment where corporate managers worry about keeping stock prices high in the short term to avoid a takeover.
Can Affect Decisions
We see that the threat of corporate takeovers is the driving force behind major corporate decisions. How can we hope to compete internationally if major corporate activity in this country is driven by takeover threats, not by the desire to build better products for the long term?
Is this activity simple paranoia on the part of corporate managers? Does it reflect the desire of corporate managers to totally insulate themselves and protect their jobs? Or, are corporate managers justified in taking steps to protect corporate assets from "raiders" whose desire, we are told, is simply to turn a quick profit in the market at the expense of companies, employees, other shareholders and the economy long term?
Takeover activity could lead to a major change in the way we govern corporations in this country. The New York Stock Exchange may change its 60-year-old rule that ensures equal voting rights for shareholders in America's largest publicly held corporations. Companies are creating "super-majority" provisions, "poison pills" and other "shark repellents" to prevent takeovers. This could lead to a community of corporate managers no longer accountable to public shareholders. Before this happens, we should understand its long-term consequences.
In takeover battles, we see dramatic price and volume swings in the stocks of target and bidder companies. Small shareholders see the impact of large institutions and arbitrageurs moving in and out of the market, and believe they have insufficient information to compete with these market professionals.
And, as for those shareholders, they voice increasing frustration that they are the victims in takeover wars. In many cases, they identify "target" managements as the culprits. Shareholders believe that managements will do anything to protect their own jobs, at great expense to the companies involved and at great injury to shareholders. Many also believe that the large players take advantage of other shareholders, simply because they have the market power to gain a better deal for themselves than for others.
If this view prevails, in the long run we may see a widespread loss of confidence among shareholders--those members of our society we ask to bear risks so that corporations can have long-term capital they need for growth and productivity.
Finally, takeover battles have significant consequences for non-shareholder constituencies--the employees and communities involved. In many cases, the cost of evading one "raider" means the company takes on large amounts of debt or is acquired by a "white knight." Employees still lose their jobs in the process and communities may suffer as a result.