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Spring-Summer 2000
Vol. 62, No. 3

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William Schwert

The word "hostile" is clearly defined in the dictionary as pertaining to or expressing enmity or opposition.

But the definition of what the popular press describes as a "hostile takeover" is not as clear, and is the subject of a recent paper by William Schwert, Distinguished University Professor and professor of finance and statistics at the Simon School. "Hostility in Takeovers: In the Eyes of the Beholder?" concludes that what we look at as a hostile takeover is primarily evidence of bargaining strategy.

"The weight of the evidence suggests that either the target or bidder firm finds it advantageous to make public the fact that there are negotiations in progress and that one side or the other is resisting," says Schwert.

He explains that the target firm has the incentive to resist publicly in the interest of attracting either an alternative bid at a higher price or inducing a current bidder to bid more. Likewise, the bidding firm has the incentive to make its bid known publicly if it thinks that letting the shareholders of the target firm know what it's willing to offer puts pressure on the target management to negotiate better and in good faith.

"In some sense, the paper is a warning to the popular and academic press to be more careful in using loaded language like 'hostility' in talking about things like takeover attempts," Schwert says. "What is characterized as a hostile takeover may just be one side or the other's bargaining strategy. If you as a reader or as a shareholder substituted the word 'bargaining' for hostility, the way you would think about these negotiations would be entirely different."

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