The Origins of the Market for Corporate Control

The standard historical narrative is that the market for corporate control took on its modern form in the mid-1950s with the emergence of the cash tender offer. Our paper, The Origins of the Market for Corporate Control, which was prepared for a University of Illinois College of Law symposium honoring Prof. Larry Ribstein, pushes the story back to the beginning of the 20^th century. Drawing primarily upon hand-collected data from newspaper reports, we show that were numerous instances during the opening half of the 20^th century where a bidder sought to obtain voting control of targeted companies when the incumbent managers were opposed to change. Having documented that the most popular hostile bid technique initially was the purchasing of shares on the stock market we explain why cash tender offers came to dominate the market for control after World War II.

The general consensus is that the market for corporate control, a term coined by Henry Manne in the mid-1960s, only began to emerge as a meaningful corporate governance mechanism in the United States in the mid-1950s when the cash tender offer was initially deployed. Various observers have acknowledged the existence of a highly rudimentary pre-1950 market for corporate control but empirical analysis was lacking until a 2011 study of ours in which we used the ProQuest Historical Newspapers database to search major daily newspapers over the period 1900-1949 to identify “open market bids” (OMBs), these being instances where an attempt was made, without consent from a target company’s board, to buy sufficient shares on the stock market to acquire control of a public company. We revisit our findings in this paper, confirming there were 82 hostile bids for control launched by way of open market purchases of shares over the fifty year period.

There was considerable variation by decade in the incidence of OMBs, with much of the variation coinciding with fluctuations in overall merger activity. The opening decade of the 20^th century was the primary exception to the prevailing pattern, with OMBs being relatively frequent as compared to the overall level of merger activity. This OMB activity focused largely on the railway sector, likely because railway companies were profitable prizes worth fighting for, because control was “contestable” (there was no dominant shareholder who could in effect veto a change of control) in a way that was rare in other industries and because legislation specific to railways meant turn of the 20^th century railway companies were compelled to disclose data that bidders needed to assess potential targets properly.

While hostile attempts to obtain voting control of publicly traded companies were occurring in the form of OMBs with some regularity more than a century ago, little is known about early tender offers. Relying primarily on the ProQuest Historical Newspapers database we identify in this paper tender offer pioneers and explain why cash tender offers became, albeit somewhat belatedly, the technique of choice among bidders. A tender offer is generally understood to mean a public invitation to a target corporation’s shareholders to buy shares tendered at a set price (a cash tender offer) or to exchange them for a specified number of the offeror’s securities (an exchange tender offer). The earliest unsolicited share exchange offer we found was made in 1901 and the earliest cash tender offer we discovered occurred in 1944. Though the general consensus is that the unsolicited cash tender offer first emerged in the mid-1950s as a technique for obtaining corporate control, overall we identified 36 hostile tender offers occurring between 1944 and 1955.

Why did the tender offer grow in popularity and ultimately become the dominant hostile takeover technique? Our paper indicates part of the reason was that capturing voting control by carrying out open market purchases became more complicated as the 20^th century went on. At the turn of the 20^th century share registers of even large public companies were sufficiently modestly sized to mean a party seeking to acquire voting control of a target company potentially could do so with a single set of instructions to a savvy Wall Street operator. Moreover, tolerance of stock price manipulation meant it often should have been possible to short circuit the share price increase that large block purchases would normally engender. Crackdowns, however, on stock price manipulation and rapidly growing share registers would soon mean that it became difficult to use OMBs to secure outright voting control of otherwise promising takeover targets. This opened the way for the cash tender offer to move the forefront after the disruption caused by the Depression and World War II subsided.

The revisionist history we provide in our paper is by no means complete. For instance, while we have traced the history of the exchange tender offer back to 1901 and the cash tender offer to 1944 our research has not been sufficiently definitive to mean our chronology will be the last word. Nevertheless, while not all pieces of the historical puzzle are yet in place, our paper indicates that the received wisdom concerning the history of the takeover bid requires at least a partial rewrite.

The full paper is available for download here.