Take-overs

One of Singh’s major research themes, recognized as seminal throughout the world, stemmed from his PhD dissertation. Singh investigated the effects of inter-firm consolidations, or more precisely, take-overs, on both the prospective and post-merger behaviour of modern business corporations. An impetus for Singh’s research was a provocative set of behavioural hypotheses crystallized in the UK by Robin Marris (1964) and in the USA by scholars such as Henry Manne (1965). They advanced two main points. First, the top managers of large corporations, often owning only a small fraction of the common stock shares of the companies they manage, have substantial discretion to build empires and otherwise deviate from efficient operation and thus fall short of maximizing their company’s potential profits. Second, if they stray in this way, their companies’ common stock prices will be depressed, creating incentives for other entrepreneurs to initiate a take-over which, if successful, leads to operational improvements and nudges the target companies in the direction of more effective profit maximization. The looming presence of this take-over threat, it was argued, creates incentives for top managers to redouble their efforts to achieve profit maximization.

For a 1971 book and a major 1975 article (Singh 1971, 1975), Singh gathered evidence on the financial performance of corporations whose common stock shares were quoted on the London Stock Exchange. His focus in the book was companies subjected to what he called take-over (on which semantic differences will materialize shortly) during the 1955-1960 period and in the later article, on take-overs occurring during a take-over wave between 1967 and 1970. In both research efforts, he found that companies in the lowest profitability ranges were indeed more likely to be taken over than those of intermediate or high pre-merger profitability. However, this effect petered out at intermediate profit levels, and the supposed merger-inducing profit differences were small compared to a more powerful variable: absolute company size. From this, Singh concluded, there was a strong incentive for companies to increase their size through an active acquisition programme. Moreover, unless take-overs (under his nomenclature) motivated by the goal of greater size per se yielded economies of scale, such take-over avoidance actions could be counterproductive and fail to drive profits towards potential maxima. Whether this happened could be tested by determining whether profits of the combined entities did indeed, taking into account other relevant variables, rise relative to their pre-take-over values. Singh’s analysis of his own limited data on this point and his review of studies done by others supported the inference that take-overs were not profit increasing on average, weakening the Marris—Manne case for take-overs as an efficiency-increasing mechanism. An analysis of much richer data by Singh’s Cambridge colleague, Geoffrey Meeks (1977), supported Singh’s inference that the profit results of mergers were in fact disappointing on average.

My own research on mergers was in part stimulated by Singh’s work. Two important clarifying insights emerged. First was a semantic clarification. Singh included as ‘take-overs’ all combinations of stock market-listed companies other than those that led to a new name for the combined enterprise, that is, A+B = A'.¹ My book with Ravenscraft (1987) distinguished among other things corporate fusions that were accomplished by more or less friendly negotiation between corporate leaders (in American parlance, mergers) and those in which the acquiring company appealed through a stock market- based tender offer, which is how the term ‘take-over’ was generally used in America. Singh recognized the difference between friendly and hostile combinations but could not secure the data to implement it. We found that the targets of hostile take-overs had pre-merger profit returns as a percentage of assets 2.28 points below the all-sample mean of 11.5%, but the differences among cohort means were not statistically significant.² Tests of post-merger performance showed, however, that the tender offer targets and especially the hostile take-over targets reported statistically significant inferior profits. Thus, our research results are consistent with Singh’s inference that the take-over mechanism is at best a weak disciplinary force. Moreover, hostile take-overs appear to have been attempted much less frequently in the USA during more recent decades.