WHICH TAKEOVERS ARE PROFITABLE - STRATEGIC OR FINANCIAL

Are friendly takeover transactions between firms in overlapping busine sses likely to be more profitable to acquirers than hostile takeovers involving firms in unrelated businesses? In a detailed study, the auth ors examine strategic and financial takeovers to determine which gener ated gains for acquirers, using the fifty largest U.S. industrial take overs from 1979 to mid-1984 as their sample. Healy et al. also studied the relation between takeover profitability and three characteristics of the transact-ions that company management controlled: 1. The targe t company managers' attitudes, which generally predicted the acquiring company's plans for the target firm. 2. The form of payment, i.e., eq uity financing or stock and debt securities. 3. The degree of overlap between the merging firms' businesses. High overlap gave the targets a nd acquirers synergistic gains. Were the takeovers profitable? The res ults show that takeovers do improve performance, but the insignificant industry-adjusted cash flow returns after takeover indicate thar the improvement was insufficient for the acquirer to earn returns beyond t hose required to justify the premium. which takeovers were more profit able; The results show that strategic or friendly takeovers generated substantial gains for acquirers. Financial, or unfriendly, transaction s broke even at best. The authors also examined how; investors' expect ations related to the subsequent results of the takecovers. The market did not seem to recognize the difference in profitability between str ategic and financial transactions.