Conceptual and Emprirical Aspects of Takeovers in New Zealand

Abstract

The background of this thesis is the long-standing public policy debate on takeovers regulation in New Zealand and in particular the recent proposed Takeovers Code. The objective of this thesis is to contribute to the debate by focusing on different conceptual and empirical aspects of takeovers in New Zealand. The thesis is in three parts: 1. A conceptual and empirical overview based on overseas experience. This part consists of the first chapter. 2. Three empirical studies examining different aspects of takeovers in New Zealand and their impact on shareholders' wealth. This part consists of chapters 2 to 4. The main objective of the empirical chapters is to contribute to the debate on takeovers regulation by providing recent and comprehensive empirical evidence, unavailable before in New Zealand. Such empirical research can shed some light on the conceptual issues and improve the understanding of efficiency and equity implications of takeovers in New Zealand. Hence it should assist policy-makers in their efforts to design an appropriate takeovers regulatory regime for New Zealand. 3. An examination of major regulatory aspects of takeovers in New Zealand. This part consists of chapters 5 to 8. It includes discussion of the debate on takeovers regulation in New Zealand over the last decade, a closer examination of the recently proposed takeovers code, a discussion of the legal and regulatory protections available to shareholders in takeovers and an empirical examination of takeovers which have attracted public criticisms and regulatory scrutiny. The specific focus of each chapter is as follows: CHAPTER ONE : Conceptual and Empirical Review of Takeovers Regulation. This chapter sets the analytical framework for takeovers regulation analysis. It discusses the significant role of takeovers and provides a review of the empirical evidence in relation to takeovers, their causes and consequences. In this context, potential efficiency and equity issues are discussed and the need for regulation is examined. CHAPTER TWO : Bidders' Initial Stake in Target Companies and Premium Paid to Remaining Target Shareholders in New Zealand Full Takeover Offers: Could it Justify a Mandatory Offer Rule? Following a review of overseas experience, this chapter explores the premiums paid to remaining target shareholders in New Zealand full takeover offers, where the bidder had an initial equity position in the target, prior to the bid. Particularly, it examines the perceived equity problem that remaining target shareholders are likely to be worse off as a result of takeover offers launched by bidders with initial stakes in the target company. The empirical results in this chapter indicate that remaining target shareholders gained, on average, significantly from full successful takeover offers. It was also found that remaining target shareholders (including the minority) are better off as a result of a takeover offer compared to their position prior to the bid, albeit to different extents. Overall, it is concluded that, on average, remaining target shareholders gained from full takeover offers, though bidders paid differential positive premiums for full control. Thus, bidders with large initial stakes in the target company paid lower premiums than bidders with small initial stakes. This chapter suggests that there are valid economic reasons to observe lower premiums by bidders with large initial stakes in the tarter company rather than to assume that it reflects a potential abuse of remaining target shareholders. This chapter concludes that, at least in respect of full takeovers launched by large (and in most cases also controlling) shareholders, there is nothing to suggest that remaining target shareholders are worse off as a result of abusive behaviour by large shareholders. CHAPTER THREE : The Source of Gains in New Zealand Takeover Offers: Wealth Creation or Merely Undervaluation? This chapter explores the source of gains in New Zealand takeover offers by examining the returns obtained by target shareholders after unsuccessful takeover offers. The empirical results in this chapter indicate that, on average, target shareholders do gain positive cumulative abnormal returns at the time of the takeover offer announcement, but this is sustained only where the actual takeover offer does take place. It was also found that in those situations where some positive returns were maintained by unsuccessful target shareholders, this reflected an expected subsequent successful takeover offer. Overall, this chapter concludes that the wealth-creation hypothesis rather than the undervaluation one is a more suitable explanation for the gains accrued to target shareholders in the New Zealand takeovers market during the period 1968-1990. CHAPTER FOUR : The Net Wealth Effect of Takeovers in New Zealand. The empirical results obtained in the previous chapter support the wealth-creation hypothesis. However, the results are not sufficient to determine whether takeovers create aggregate net wealth for both target and bidding shareholders. This chapter examines the net-wealth effect of takeovers in New Zealand. In this context, the net-wealth creation hypothesis was contested against the redistribution hypothesis. The empirical evidence in this chapter supports the net-wealth creation hypothesis. Both groups of targets and bidders gained, on average, positive abnormal returns around the takeover announcement. Overall, the portfolio of takeovers yielded substantial, inflation-adjusted, net wealth of around $1.7 billion. The majority of the gains went to the group of targets, and this would suggest that the market for corporate control in New Zealand is fairly competitive. The chapter concludes that, based on the empirical evidence, takeovers in New Zealand, on average, created significant benefits for both groups of shareholders and therefore increased overall net wealth. CHAPTER FIVE: The Debate on Takeovers Regulation in New Zealand Over the Last Decade. Following the empirical examination of takeovers in New Zealand, this chapter discusses more specifically the debate on takeovers regulation in New Zealand over the last decade. In this context, the evolution of the debate and the broad points at issue as advocated by the opponents and proponents are discussed. CHAPTER SIX : Efficiency and Equity Implications of the Proposed New Zealand Takeovers Code. Following the previous chapter, which examined the debate in New Zealand over different proposals, this chapter more specifically examines the main features of the recently proposed takeovers code and their compatibility with the objectives set under the Takeovers Act 1993. In this context, the proposed rules are described and their potential efficiency and equity implications are explored. CHAPTER SEVEN : Existing Legal and Regulatory Protections for Shareholders in Takeover Situations. This chapter discusses the current takeovers regulatory regime in New Zealand and its effectiveness in addressing potential problems imposed by takeovers. In this context, the proposed New Zealand Stock Exchange Listing Rules and the new Companies Act 1993 are also reviewed. CHAPTER EIGHT : Do Takeovers in New Zealand Impose Equity Problems? - An analysis of Takeovers which have Attracted Adverse Public Comments and Regulatory Scrutiny. The general empirical evidence is that takeovers are beneficial to shareholders. The empirical results, however, refer to the average experience. One should also analyse the specific cases that do not follow the general trend. This chapter examines examples of takeovers which have attracted public criticism and regulatory scrutiny. Such an examination assists in understanding the concerns that are raised, from time to time, against takeovers. This chapter identifies four groups of potential problems. While one identified problem of potential wealth expropriation through dealing with interested parties relates to a potential breach of the existing law, the other three problems reflect only the dissatisfaction of some shareholders and regulatory bodies with the current regulatory framework of takeovers. In the context of the potential wealth-expropriation problem, the chapter examines closely the specific deficiencies and analyses the regulatory remedies available with emphasis on the New Zealand Stock Exchange Listing Requirements and the Companies Act 1993. SUMMARY : This chapter provides a summary of the major empirical findings of this thesis. It also discusses some broad conclusions based on the empirical and conceptual research undertaken in this thesis and based on overseas evidence.