Takeover Bid Rules and M&A Premiums: Who Pays the Price for Investor Protection?

The mandatory bid rule (MBR) introduced in many OECD and G20 countries requires acquirers of company shares to make a fair offer to the remaining shareholders when certain conditions occur. This so-called mandatory bid is triggered when acquirers exceed certain control thresholds and thus gain control of a target company, or take control by transferring an old block position (Grant, Kirchmaier & Kirshner, 2009; Ferrarini & Miller, 2009; Eswar, 2019). The introduction of MBRs has two main objectives. First, it aims to deprive existing majority shareholders of the possibility to sell controlling rights in block positions to an acquirer away from the public capital market. Secondly, the MBR protects minority shareholders in the context of the takeover by offering them an exit option if they do not want to be minority shareholders of a controlled company or disagree with the majority of shareholders (Ferrarini & Miller, 2009; Clerc et al., 2012).

Alcalde and Pérez-Soba (2016) analyze whether the introduction of the MBR has changed the level of the takeover premium. The results suggest that the takeover premium paid, is lower after the introduction of the MBR. The study is limited because it is restricted to corporate takeovers in Spain and thus does not allow for generalized findings in a global context, as individual jurisdictions differ significantly in the design of MBRs. Eswar (2019) examines the impact of the introduction of MBR on the cumulative abnormal returns of target firms and analyses time-series and cross-sectional differences over the period from 1990 to 2009 using a sample of fifteen European countries. The author finds that the introduction of this kind of investor protection has a significant positive impact on acquirer cumulative abnormal returns, suggesting overpayment and hence higher takeover premia. Both of the above contributions do not consider the influence of successive share acquisitions, irrespective of the triggering of a takeover bid, on the premium paid. When referring to successive share acquisitions, the takeover premium is likely to depend on how many shares the acquirer already owns. The successively tightening of the market alone, but also the possibility for minority shareholders to effectively prevent the acquisition of further rights, will contribute to an increase in the offer price. Or in other words: The more control acquired or sought for, the higher the premium. The results of Pérez-Soba, Márquez-de-la-Cruz and Martínez-Cañete (2018) accordingly show that acquirers below the MBR threshold are willing to pay significantly higher premiums to gain some control in the company in the first place.

While many deal-, target- and acquirer-specific influencing factors are an integral part of quantitative-empirical capital market research and have been extensively researched, the influence of the regulatory determination of the MBR on the premium paid has not yet been sufficiently investigated. This and the limitations of the existing contributions, are the reason for our motivation in this large-scale empirical, multi-national study to gain insights for the first time into the influence of the MBR on the takeover premium actually paid, and what consequences this has for the remaining shareholders.

We hypothesize that exceeding the threshold that triggers a mandatory bid is associated with a significant change in the takeover premium. We assume that the threat of a compulsory bid has a deterrent effect on potential buyers, which is reflected in the prices and the takeover premium. In this analysis, we consider the impact of successive share acquisitions, following Pérez-Soba, Márquez-de-la-Cruz, and Martínez-Cañete (2018), irrespective of the triggering of a takeover bid, and assume an increasing takeover premium with increasing pre-acquisition shares. We define a normal takeover premium as a function of the pre-acquired share and a residual takeover premium as an abnormal takeover premium, as a function of exceeding the specific MBR threshold. To test the central hypothesis, we run an OLS regression with cross-sectional data.

We can show that exceeding the MBR threshold is generally associated with significant discounts on the takeover premium. Important exceptions are the jurisdictions of Australia and Canada, where exceeding the MBR threshold leads to significant price premiums. The question arises as to whether national legislators, by introducing MBRs, miss the purpose of protecting minority shareholders if the related price discount is not proportionate to the intended protective effect. The contribution of this research work is to obtain reliable findings on the influence of exceeding MBR thresholds on the amount of the takeover premium in the takeover of listed target companies.

The paper is structured as follows: the Legal Framework, Literature Review, and Hypothesis Development in section two are followed by Methodology and Sample in section three. In section four there are the Empirical Results and Discussion sections. Section five concludes the paper.

OECD (2021) allows an insight into the implementation and design of the MBR of a total of 49 countries, including all OECD, G20 and Financial Stability Board members. It shows that the level and implementation of the thresholds for triggering a mandatory offer differ significantly. While some countries set one or more single thresholds, others have combined a minimum threshold with other optional or additional triggers, where an increase in voting rights triggers a new takeover bid. Some countries link the threshold to the size of the target company. Furthermore, some countries do not have a threshold, so the trigger of a takeover bid is linked to other criteria. Table 1 provides an overview of the thresholds and alternative takeover bid triggers for the countries considered in the OECD (2021). Beyond the thresholds and triggers, a distinction can be made between the ex-post and ex-ante approaches in the application of MBRs. The ex-post approach obliges bidders to launch a mandatory bid after acquiring shares exceeding the threshold. This contrasts with the ex-ante approach, which requires bidders to make a mandatory bid before acquiring shares exceeding the threshold. According to OECD (2021), most jurisdictions considered in connection with the MBR have established a mechanism for determining a minimum offer price, which is measured either by the highest price paid by the bidder, the average market price, or a combination of both. The jurisdictions of Israel, Japan, South Korea, Mexico, New Zealand, and South Africa do not have minimum bid price rules. A more comprehensive overview is provided in Annex 1, which also contains the minimum bid price rules according to OECD (2021).

The MBR is not found in all countries with a developed capital market. For example, the United States of America is an exception, as the Williams Act, introduced in 1968 to regulate corporate takeovers, does not require MBR (Kenyon-Slade, 2004). It is at the discretion of the bidder whether to approach shareholders, either on an unsolicited basis without the target's prior consent or on the basis of a private agreement between the bidder and the target (OECD, 2021).

In the literature, Rossi and Volpin (2004) analyze a total of 49 countries in their paper and – among many other determinants — analyze the effect of a MBR and other more general national minority shareholder protection regulations on the takeover premium paid. The diametric results show that the introduction of the MBR has a significantly negative impact, and the general national measures to strengthen minority shareholder protection have a significantly positive impact on the takeover premium. The study is limited since it has a more general scope, it refers to the legal status of 1995, which is outdated from today's perspective, and successive share acquisitions were not controlled for. In their study, Alcalde and Pérez-Soba (2016) use OLS regression to investigate whether the introduction of the MBR has significantly improved the protection of minority shareholders, measured by the number of takeovers and the offered premium, in Spain over time. The results suggest that the introduction of the MBR in Spain has not contributed to improve minority shareholder protection. Overall, a decrease in the number of takeover bids in the Spanish corporate control market was observed. On the other hand, the results show that the takeover premium paid is significantly lower after the implementation of the MBR than before.

The aforementioned results are in line with Clerc et al. (2012), who shows in an earlier study that the European market for corporate control has not become more open or competitive since the implementation of the MBR. The paper by Eswar (2019) uses the difference-in-differences approach to investigate whether the implementation of the MBR in European countries, affects the cumulative abnormal returns of target firms. The results suggest that the change in legislation leads to higher cumulative abnormal returns. The authors thus provide indications for an overpayment of the acquirer and a higher takeover premium. However, in principle, the higher cumulative abnormal returns of the target can also be attributed to influences other than the size of the takeover premium.

Based on the available evidence, we hypothesize that exceeding the threshold that triggers a mandatory offer is associated with a significant change in the takeover premium.

Pérez-Soba, Márquez-de-la-Cruz, and Martínez-Cañete (2018) investigate the characteristic features of a block M&A transaction below the MBR threshold and their impact on the takeover premium for the Spanish market. Even though the research was conducted below the mandatory bid threshold and only for the national market, their results show that acquirers are willing to pay significantly higher premiums to gain some control in the company. We, therefore, expect that successive share acquisitions, irrespective of the triggering of a takeover bid, will be associated with a significantly increasing takeover premium.

Refinitiv Eikon registers 293,291 completed M&A transactions with a deal volume larger than or equal to 1 million USD in the period 01.01.2000 to 31.12.2021. Transactions with a deal volume of less than 1 million USD are excluded from the analysis due to their economic irrelevance. In further data processing, all incomplete observations are removed, leaving 39,215 complete observations in the data set. In the next step, all transactions corresponding to the deal form “buyback” or “recapitalization” are removed from the sample since the “buyback” as a share buyback, and the “recapitalization” as an equity and debt restructuring measure does not represent an M&A transaction in the true sense. Furthermore, only transactions in which the target company is listed on the stock exchange and has “public” status are included.

In a second step, all transactions are excluded where the target nation does not correspond to the countries under consideration, according to OECD (2021) (see Table 1). The target nations Brazil, Chile, Korea, and the United States of America were also removed from the dataset. These countries do not have a codified MBR threshold, according to OECD (2021). This leaves 22,187 transactions to be considered for further analysis. Appendix 2 shows that Japan is the target nation with the most transactions (4,552), followed by China (2,893) and Canada (2,893). ⁽¹⁾ The three target sectors with the most transactions are “Consumer Cyclicals” (4,186), “Industrials” (3,715), and “Basic Materials” (3,242), as shown in Appendix 3. The years 2007 (1,444), 2008 (1,258), and 2009 (1,327) account for the most transactions (see Appendix 4).

The explained variable is the 1-week takeover premium (PREM1WEEK) in percent, which is calculated from the closing share price on the announcement day minus the closing share price one week before the announcement, divided by the closing share price one week before the announcement. The explained deal variables 4-week and 1-day takeover premium (PREM4WEEK, PREM1DAY) are also introduced for subsequent robustness tests.

To operationalize the impact of the MBR on the takeover premium in appropriate explanatory variables, dummy coded MBR threshold variables (MBR.20, MBR.25, MBR.30, MBR.33, and MBR.Larger.33) are created for target nations with one or more individual thresholds. These contain the value “1” if the transaction exceeds the corresponding national threshold and “0” in all other cases. For target nations with a minimum threshold and additional triggers or conditions, the MBR threshold variables are created for the minimum threshold only. For target nations where the threshold is linked to company size, the lowest threshold is coded. Finally, 12 thresholds were identified, with the first four (MBR.20, MBR.25, MBR.30, and MBR.33) applied in 39 of the 57 target nation restrictions. In the analysis, the remaining eight thresholds (35%, 40%, 45%, 50%, 60%, 66%, 75%, and 90%) were coded, but the individual effects were combined into one variable (MBR. Larger.33) for the regression.

Referring to the findings of Pérez-Soba, Márquez-de-la-Cruz, and Martínez-Cañete (2018) that acquirers pay a significantly higher takeover premium with an increasing degree of control, we control for the impact of this successive share acquisition in the form of dummy-coded share interval variables. The variable CI.XtoY is a dummy-coded variable that always takes the value “1” if the acquirer holds less than or equal to Y% of the target before the transaction and more than or equal to X% after the transaction. Accordingly, if, for example, an acquirer already holds 7% before the transaction and 17% after, the variables, CL.5to10, CL10to15, and CL15to20 will be set to “1”.

In quantitative empirical capital market research, numerous deal-, target- and acquirer-specific determinants of the takeover premium are well known. Table 2 below provides an overview of the control variables used.

To deal with outliers, the deal variables 4-week, 1-week, and 1-day takeover premium (PREM4WEEK, PREM1WEEK, PREM1DAY), as well as the target variables leverage ratio (LEVERAGE), return on capital employed (ROCE) and book-to-market ratio (B2MR), are winsorized to the 1% and 99% percentile. The deal variable Deal Value in USD million (DEALVAL) is logarithmized with the natural logarithm.

We control for possible self-selection bias in the sample using the two-step Heckman approach. In the initial stage, we estimate the probability that a given M&A transaction will proceed to completion. This is a prerequisite for observing an acquisition premium. The relative size of the target to the acquirer is utilized as the exclusion restriction for identification purposes. This variable is motivated by prior M&A research (e.g., Moeller et al., 2004), which demonstrates that deals involving relatively larger targets are more likely to fail due to financing constraints, integration complexities, or regulatory concerns. Consequently, the target-to-acquirer size ratio emerges as a robust predictor of deal completion. However, it is unlikely to exert a direct influence on the premium paid in completed transactions, thereby satisfying the requirement for a valid exclusion restriction.

While this instrument possesses empirical precedent and theoretical plausibility, it must be acknowledged that it may not be entirely free from endogeneity if unobserved characteristics—such as synergistic potential or strategic fit—affect both deal size and pricing. To address these concerns, we employ robustness checks using alternative model specifications and clustering techniques. Nevertheless, we interpret the results of the Heckman correction with appropriate caution and present them as one part of a broader empirical strategy.

We build a probit model mainly with the same variables than our regression model and determine the inverse Mills ratio (λ) for all observations. We insert the λ into the OLS model (1) in the second step. (1) PREM1WEEKi=const+∑xβxMBRx+∑YβYCIy+β1lnDEALVALi+β2PAYMENTi+β3ATTITUDEi+β4SECTOR.RELATEDi+β5PUBLIC.ACQi+β6LEVERAGEi+β7ROCEi+β8B2MRi+β7ROCEi+∑aβaYEARa+∑bβbSECTOR.ACQb+∑cβcSECTOR.TARGETc+∑dβdNATION.ACQd+∑eβeNATION.TARGETe+λi+εi \matrix{{PREM1{WEEK}_i =} \cr {const + \sum\nolimits_x {{\beta_x}{MBR}_x} + \sum\nolimits_Y {{\beta_Y}{CI}_y + {\beta_1}{lnDEALVAL}_i + {\beta_2}{PAYMENT}_i + {\beta_3}{ATTITUDE}_i}} \cr {+ {\beta_4}SECTOR.{RELATED}_i + {\beta_5}PUBLIC.{ACQ}_i + {\beta_6}{LEVERAGE}_i + {\beta_7}{ROCE}_i + {\beta_8}{B2MR}_i} \cr {+ {\beta_7}{ROCE}_i + \sum\nolimits_a {{\beta_a}{YEAR}_a} + \sum\nolimits_b {{\beta_b}SECTOR.{ACQ}_b} + \sum\nolimits_c {{\beta_c}SECTOR.{TARGET}_c}} \cr {+ \sum\nolimits_d {{\beta_d}NATION.{ACQ}_d} + \sum\nolimits_e {{\beta_e}NATION.{TARGET}_e + {\lambda_i} + {\varepsilon_i}}} \cr}

To ensure the robustness of the regression results, we include robust standard errors against heteroskedasticity to avoid the risk of bias in the standard errors.

Of the 22,187 M&A transactions considered in the survey, a total of 20,099 deals were financed with cash and 2,088 deals with equity swaps. Most of the takeover behavior was friendly (20,093), while 94 transactions were categorized as hostile. A total of 5,721 cross-border transactions were recorded where the target nation was not the same as the acquirer nation. In the vast majority of transactions (13,603), there is no match between the economic sector of the target and the acquirer. 15,162 of the acquirers have the status “public” and 7,025 are classified as “private”. Table 3 shows all metric variables. Despite the winsorisation, the deal variables 4-week, 1-week and 1-day acquisition premium show considerable skewness in the distribution due to a deviation of the median from the arithmetic mean.

The regression results of Model 2 in Table 4 show: While exceeding the 20% MBR threshold shows a significant positive impact, the 25%, 30%, and greater than 33% MBR thresholds show substantial negative results. The 20% MBR threshold group includes the jurisdictions of Australia and Canada, with 3,789 transactions exceeding the threshold (17.078%). We find a particularly strong MBR effect in the jurisdiction of Canada. In contrast, the MBR threshold groups 25%, 30% and greater than 33% show a significant negative MBR effect on the takeover premium. We find particularly strong MBR effects in the 25% MBR threshold group in India and in the 30% MBR threshold group in China, Hong Kong, Latvia, Mexico, Singapore and Spain. The 25% MBR threshold group has 524 (2.362%) and the 30% MBR threshold group has 3,441 (15.510%) cross-threshold transactions. The larger than 33% MBR threshold group is an exception as it combines various overlapping individual thresholds and their individual regression effects and coefficients into one regressor. Estonia particularly drives the negative effect at 50%, Indonesia at 50%, Peru at 60%, Israel at 90%, and New Zealand at 90%. In total, 710 above-threshold transactions (3.200%) fall into the greater than 33% MBR threshold group. We cannot find a statistically significant result for the 33% threshold group (MBR.33), which includes 2,078 above-threshold transactions (9.366%).

Within the scope of the study, we controlled for the effect of successive share acquisition in the form of the share interval variable to isolate it from the effect of MBR on the takeover premium. Single significant results can be detected: The control interval 5–10% has a significant negative, and the control intervals 50–55%, 75–80%, and 95–100% have a significantly positive effect on takeover premiums paid. We interpret the significant regression result in the control interval of 5–10% as a reverse squeeze-out effect. We interpret the positive effect in the control interval of 50–55% as a price premium for the acquisition of most rights in the target company and related obligations, such as the obligation to fully consolidate the target company as a subsidiary in the consolidated financial statements. We interpret the positive effect in the 75–80% control interval as a price premium because the acquirer deprives the minority shareholders of the possibility to prevent resolutions by a qualified majority so that the remaining shareholders can no longer form a blocking minority. Furthermore, we interpret the positive effect in the 95–100% control interval as a price premium in the context of an initiated squeeze-out procedure and the associated compensation for the exclusion of minority shareholders.

The impact of deal value (lnDEALVAL) is significantly positive, consistent with the findings of Zhu and Jog (2009) and Moeller, Schlingemann, and Stulz (2004). The choice of cash financing (PAYMENTCash), as opposed to equity swaps, is significantly positive, consistent with the findings of Wansley, Lane, and Yang (1987) and Davidson and Cheng (1997). The results show that hostile takeover behavior, as opposed to peaceful, also significantly impacts the takeover premium. Like Swenson (1993) and Rossi and Volpin (2004), we can also show that cross-border transactions (CROSSBORDER) lead to significantly higher takeover premia. Like Alexandridis et al. (2013), we do not find a significant directional relationship when the economic sectors of the target and the acquirer match (SECTOR.RELATED)—on average, publicly listed acquirers (PUBLIC.ACQPublic) pay significantly higher premiums. We thus support the findings of Bargeron et al. (2008) and Zhu & Jog (2009), who conclude that private acquirers pay lower premiums than public acquirers. We find a significant, positive influence of the leverage ratio (LEVERAGE) on the takeover premium. Furthermore, we find a negative impact of the target variable Return on Capital Employed (ROCE) on the takeover premium and a positive impact of the variable Book-to-Market Ratio (B2MR) on the premiums. The fixed year, target sector, acquirer sector, target nation, and acquirer nation effects were added to the models.

We checked our results for robustness by introducing the 1-month takeover premium and the 1-day takeover premium as explained variables in the models. The robustness checks carried out generally confirm the results obtained (see Appendix 5). This work is not without limitations. On the one hand, we acknowledge that in the dataset, after adjustment, there is an overweighting of countries such as China or Japan relative to the distribution of M&A transactions across the selected countries. Second, we could only operationalize the effect of MBR through thresholds. Since, in many countries, there are additional triggers for a mandatory offer besides the fixed thresholds, pure threshold variables in the OLS regression cannot fully capture the effect (see Table 1).

Furthermore, this study does not differentiate between mandatory and voluntary takeover rules. The binding nature of a takeover rule may influence its effect. Again, not all the target nations considered have a minimum bid price rule, so the effectiveness of the MBR in these jurisdictions is questionable.