Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:


Researcher Finds Good Management, Open Market Stock Buy-backs Deter Takeover Attempts

The best way for companies to avoid becoming takeover targets is to engage in regular stock buy-backs on the open market, according to research by a University of Iowa business professor.

“Firms that buy their stock back on the open market are seen as more efficient and more sensitive to shareholder interests,” said Matt Billett, professor of finance in the Tippie College of Business. “It’s a sign of shareholder-friendly management.”

Billett recently studied more than 23,000 U.S. companies to determine whether open market share repurchases deter takeovers. What he and his co-author found was evidence that, for the first time, verified the conventional wisdom that, indeed, they do.

“While tender offers have been shown to act as an effective defense in the midst of takeover battles, open market repurchases may deter unwanted bids, pre-empting would-be acquirers from bidding in the first place,” Billett said.

In the research, Billett found 2,544 of the 23,000 companies he examined engaged in open market stock repurchases. A similarity he found in the firms that bought back stock is that many of them exhibited signs at some point of becoming a potential takeover target. He found that the top 5 percent of companies that engaged in open market re-purchases bought back an average of 15 percent of their own stock at a time, a large number that demonstrated management knew the firm could be a take-over target.

Billett said his research shows a well-managed firm will repurchase its stock when management senses a high takeover probability. He cites the example of Sears, which in 1989 bought back huge amounts of its own stock—even selling its iconic Chicago skyscraper to raise more cash—to ward off rumored take-over attempts. In the end, no attempt was made.

“When the economic environment becomes more favorable to the firm becoming a takeover target, management with greater sensitivity to the market will buy back shares to make themselves less attractive,” he said.

Buy-backs do more than just show management can read the economic landscape, though. He said a stock repurchase shows the management is sharp enough to recognize they may be a takeover target and will take the appropriate measures to avoid it.

On top of that, he said a buy-back shows management is willing to return cash to the shareholders, pay debt with limited resources, and generally make it a bigger challenge for themselves to run the firm.

“It’s a key way to show that management has shareholders’ goals in mind, and it reflects that the company is being managed in a way shareholders want,” he said. “It’s a message to shareholders that they don’t need someone to come in and change the company’s management.”

Buy-backs also score points for management with shareholders because they put the firm’s money in their own pockets for the shares they sell, and increases the value of the shares they don’t sell.

“It shows a willingness on behalf of management to give up resources to shareholders,” he said.

Billett also found that small firms tend to buy back more of their own stock, in part to draw attention to themselves.

“Little is known about small firms because they aren’t mature and have less public scrutiny, unlike larger firms that get a lot of attention from the media and shareholders,” said Billett. “So one way for a small firm to call attention to itself is to buy back some of its shares to increase the stock price in a way that people will notice.”

But Billett also pointed out that open market buybacks work only if the share price is fairly or under-valued, because buying back over-valued stock loses the firm money when the share price finally drops.

Billett’s paper, “The Takeover Deterrent Effect of Open Market Share Repurchases,” co-authored by the late Hui Xue of Kansas State University, was recently published in the Journal of Finance.

Tom Snee | newswise
Further information:

More articles from Business and Finance:

nachricht Blockchain Set to Transform the Financial Services Market
28.09.2016 | HHL Leipzig Graduate School of Management

nachricht Paper or plastic?
08.07.2016 | University of Toronto

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: New 3-D wiring technique brings scalable quantum computers closer to reality

Researchers from the Institute for Quantum Computing (IQC) at the University of Waterloo led the development of a new extensible wiring technique capable of controlling superconducting quantum bits, representing a significant step towards to the realization of a scalable quantum computer.

"The quantum socket is a wiring method that uses three-dimensional wires based on spring-loaded pins to address individual qubits," said Jeremy Béjanin, a PhD...

Im Focus: Scientists develop a semiconductor nanocomposite material that moves in response to light

In a paper in Scientific Reports, a research team at Worcester Polytechnic Institute describes a novel light-activated phenomenon that could become the basis for applications as diverse as microscopic robotic grippers and more efficient solar cells.

A research team at Worcester Polytechnic Institute (WPI) has developed a revolutionary, light-activated semiconductor nanocomposite material that can be used...

Im Focus: Diamonds aren't forever: Sandia, Harvard team create first quantum computer bridge

By forcefully embedding two silicon atoms in a diamond matrix, Sandia researchers have demonstrated for the first time on a single chip all the components needed to create a quantum bridge to link quantum computers together.

"People have already built small quantum computers," says Sandia researcher Ryan Camacho. "Maybe the first useful one won't be a single giant quantum computer...

Im Focus: New Products - Highlights of COMPAMED 2016

COMPAMED has become the leading international marketplace for suppliers of medical manufacturing. The trade fair, which takes place every November and is co-located to MEDICA in Dusseldorf, has been steadily growing over the past years and shows that medical technology remains a rapidly growing market.

In 2016, the joint pavilion by the IVAM Microtechnology Network, the Product Market “High-tech for Medical Devices”, will be located in Hall 8a again and will...

Im Focus: Ultra-thin ferroelectric material for next-generation electronics

'Ferroelectric' materials can switch between different states of electrical polarization in response to an external electric field. This flexibility means they show promise for many applications, for example in electronic devices and computer memory. Current ferroelectric materials are highly valued for their thermal and chemical stability and rapid electro-mechanical responses, but creating a material that is scalable down to the tiny sizes needed for technologies like silicon-based semiconductors (Si-based CMOS) has proven challenging.

Now, Hiroshi Funakubo and co-workers at the Tokyo Institute of Technology, in collaboration with researchers across Japan, have conducted experiments to...

All Focus news of the innovation-report >>>



Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

Agricultural Trade Developments and Potentials in Central Asia and the South Caucasus

14.10.2016 | Event News

World Health Summit – Day Three: A Call to Action

12.10.2016 | Event News

Latest News

Resolving the mystery of preeclampsia

21.10.2016 | Health and Medicine

Stanford researchers create new special-purpose computer that may someday save us billions

21.10.2016 | Information Technology

From ancient fossils to future cars

21.10.2016 | Materials Sciences

More VideoLinks >>>