Corporate Takeovers: The Efficiency Arguments

F. M Scherer
1988 Journal of Economic Perspectives  
I n recent years, the tender offer takeover has been praised and damned with a ferocity suggesting that the survival of capitalism is at stake. The truth, as in most disputes with substantial metaphysical content, is more prosaic. Some takeovers enhance economic efficiency, some degrade it, and the balance of effects, though not fully known, is most likely a close one. In this essay I try to lay bare the debate's foundations and bring it back to earth with an injection of evidence. The
more » ... al Bases No match made in heaven is more blissful than an extant economic theory that finds an important real-world phenomenon to explain. The theory of takeovers articulated in Robin Marris's seminal article (1963) argues that two market failures can be corrected by the proper functioning of a third market-the market for corporate control. Competition in product and input markets may fail, it is said, to weed out firms that have strayed from the path of cost minimization and profit maximization. Within companies free from strong external market pressure, the "separation of ownership and control" identified by Berle and Means (1932) allows managers to pursue investment and cost-padding strategies that fail to maximize the profits of absentee owners-the shareholders. But a well-functioning market for corporate control comes to the rescue. Outside interests, seeing that profits would be
doi:10.1257/jep.2.1.69 fatcat:tjc47hkze5ad3lcuspa2bqlgiu