Family-owned companies offer on average lower takeover premiums when purchasing another company. This is because, especially in comparison with free float companies, family-owned companies are more able to prevent risky or wrong decisions by the board of directors. This is the result of a current study by WHU - Otto Beisheim School of Management.
During the takeover of a firm, excessive takeover premiums are often paid. One of the reasons for this is that more often than not, the salaries of the members of the board of directors increase after a major acquisition. Risks are often evaluated as too low and the expected synergies too high – executive board decisions which can cost the shareholders a lot of money.
“We asked ourselves the question, which type of shareholder is best at preventing the members of the board of directors from making such decisions," explains Assistant Professor Max Leitterstorf, who is researching at the Institute for Family Businesses at WHU. Together with his co-author, he has investigated 149 takeover bids for listed companies which were submitted to the German Prime Standard. “The balance of power between shareholders and directors depends particularly on how wide ownership is spread", explains the researcher. “Whilst small shareholders generally have hardly any influence on the board of directors, a major shareholder with at least 25 per cent of the voting rights is in a much stronger position. He can prevent board decisions if he believes them to be incorrect or too risky." Companies with a major shareholder should on average offer a lower takeover premium than companies without major shareholders.
Within the group of different major shareholders, the family stands out in particular. This is because the priority for families is often keeping the company and passing it on to future generations. For this reason, the already risky decision to pursue a takeover is viewed particularly critically. “A careful family would, for example, attach a low value to estimates for possible synergies, and as such offer a lower takeover premium,” says Leitterstorf. “This effect of the cautious approach is further enhanced when the CEO of the company is also a family member."
This is also confirmed by the study data: Family companies offer even lower premiums than companies with other major shareholders. Premiums offered by family companies with a family CEO are particularly low.