Value Maximization and the Acquisition Process

L ike the rest of us, corporate managers have many personal goals and ambitions, only one of which is to get rich. The way they try to run their companies reflects these personal goals. Shareholders, in contrast, deprived of the pleasures of running the company, only care about getting rich from the stock they own. Hence, when managers ignore profits to keep up traditional lines of business, conflicts are bound to arise. While many academic papers teach us that shareholder and market pressure will still force managers to maximize value, the newspapers remind us that this is not always the case. Much corporate behavior seems best understood in terms of managers running the show largely as they please. The takeover wave of the 1980s put the manager-shareholder conflict to a new test. Where other checks on management failed, hostile takeovers could now wrest control from managers who ignored the interests of their shareholders. More so than ever before, fear of such disciplinary takeovers has forced managers to listen to shareholder wishes. But even now, many acquisitions are not of this disciplinary variety. Ironically, making acquisitions is often just the quickest and easiest way for managers to expand the scope of their control by directing the firm's cash flows into new ventures. In this paper, we appraise the acquisition process from the managerial perspective. Has the pressure brought by hostile takeovers effectively restricted non-