Hostile to Whom? 'Economic Patriotism' To Resist 'Market Dictatorship'

Artigo de Anthony de Jasay na Library of Economics and Liberty.

It is of course the height of absurdity to term offers made by buyers to sellers as 'hostile' or 'friendly'. They are neither. The seller is free to accept or reject them. They may be hostile, though, to the sellers' agent who may lose his tenure if the seller accepts the bid. He can protect himself against this risk in two ways. One is by populist appeals to public opinion, legislative and regulatory manoeuvres, 'poison pills' and the like. The other is by brilliant managerial performance that gets so close to the ideal of long-run profit maximisation that no one thinks he can make much better use of the assets by wresting control of them from the sitting directors.

The branch of theory dealing with the value of corporate control was grafted onto the theory of the firm by Henry Manne1. It would be impertinent to try and give a capsule summary of his short seminal article here. Suffice it to say that the control premium offered by a bidder will lie in a gap, if any, between the company's market capitalisation under its sitting management and the present value of all future earnings the bidder expects the corporate assets to yield under the best management he can appoint. The bigger the gap, the bigger must the agency problem be. Equally, however, the bigger the gap, the stronger is the incentive potential bidders have to try and buy the corporate control. If potential bidders are not deterred by regulatory twists, poison pills and appeals to patriotism or good manners, the sitting management must strain to 'increase shareholder value' (as the current jargon has it) by better performance as well as by inspired rumours of impending bids so as to reduce the remaining gap between the current value of the company and its expected value to a rival, i.e. the control premium the rival would be willing to pay. Discouraging bids is to encourage sloth and inefficiency. Until this is better understood, agents will ride high on the backs of principals.