Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

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

07.05.2008
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:
http://www.uiowa.edu

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

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: Significantly more productivity in USP lasers

In recent years, lasers with ultrashort pulses (USP) down to the femtosecond range have become established on an industrial scale. They could advance some applications with the much-lauded “cold ablation” – if that meant they would then achieve more throughput. A new generation of process engineering that will address this issue in particular will be discussed at the “4th UKP Workshop – Ultrafast Laser Technology” in April 2017.

Even back in the 1990s, scientists were comparing materials processing with nanosecond, picosecond and femtosesecond pulses. The result was surprising:...

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

Im Focus: MADMAX: Max Planck Institute for Physics takes up axion research

The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.

The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

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

14.10.2016 | Event News

 
Latest News

Simple processing technique could cut cost of organic PV and wearable electronics

06.12.2016 | Materials Sciences

3-D printed kidney phantoms aid nuclear medicine dosing calibration

06.12.2016 | Medical Engineering

Robot on demand: Mobile machining of aircraft components with high precision

06.12.2016 | Power and Electrical Engineering

VideoLinks
B2B-VideoLinks
More VideoLinks >>>