Organizations and Markets

The Original Corporate Raider

3 February 2008 at 5:50 pm Peter G. Klein 2 comments

| Peter Klein |

Did you catch Henry Manne’s tribute to Louis E. Wolfson, whom Manne calls “the original corporate raider,” in the 18 Jan WSJ?

[T]he obituaries dutifully acknowledged that he was a serious and valued benefactor of children’s health care, and that he devoted himself in later life to the cause of penal reform. . . . They missed the big story. Wolfson’s contribution to human welfare far exceeded the total value of all private philanthropy in history. He invented the modern hostile tender offer. This invention, which activated and energized the market for corporate control, was the primary cause of the revolutionary restructuring of American industry in the 1970s and ’80s, and the ensuing economic boom.

Before Wolfson’s innovation, executing a “hostile” (i.e., against the wishes of incumbent management) takeover required winning a long and potentially costly proxy contest. Now, potential bidders could appeal directly to shareholders, asking them to “tender” their shares at the offered price, bypassing the incumbent management team altogether. Naturally, this outraged the business establishment — the “powerful corporate elite of the 1960s,” as Manne calls them — and pressure mounted for legislation to restrict hostile takeover offers, leading to the 1968 Williams Act, designed to protect incumbent managers by giving them time to prepare counter-offers and otherwise restricting “raiders.”

My dissertation focused on the conglomerate merger wave of the 1960s, and I once planned to do a public-choice analysis of the Williams Act (which wasn’t targeted specifically at conglomerate takeovers, unlike later investigations of conglomerates by the FTC and Antitrust Division). I never got around to it, however, and as far as I can tell no one else has either. There’s not much on the Williams Act, specifically, in the McChesney and Shughart book or in Strong Managers, Weak Owners. John Armour and David Skeel have a brief discussion in their working paper on the origins of anti-takeover law (pp. 17ff.). They note:

One might have expected the principal opposition to [Senator Williams’s] proposal to come from institutional shareholders such as pension funds and insurance companies whose stock holdings benefited from the premium prices paid by takeover bidders. Clamping down on tender offers would mean fewer takeover premia. But one searches the legislative history in vain for evidence that institutional shareholders entered the legislative fray. Their relative silence may have reflected the fact that the institutions were not particularly well-coordinated, and their overall stock holdings were much smaller than they became in the succeeding decades. Shareholder voice may also have been chilled by the knowledge that American lawmakers get nervous when financial institutions flex their muscles on corporate governance issues.

The same kind of pattern, of course, was repeated in the 1980s with the prosecution (and persecution) of Michael Milken on trumped-up securities charges for popularizing the use of high-yield (“junk”) bonds as a takeover financing tool. (Daniel Fischel’s Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution is must reading on this point.)

Entry filed under: - Klein -, Corporate Governance, Institutions, Theory of the Firm.