Amid the desultory attempts to find a solution to the takeover binge, not much has been said about one of the most basic causes--the vast transformation of the stock market.
Put simply, the market has changed from a public marketplace, where the players are all essentially equal, to a professionals' market, overwhelmingly dominated by the trading of a relatively few managers of very large funds.
Essentially, it is this change that has made corporate raiding easy. Professionals can react quickly enough and with significant enough blocks of stock to make the market serve the raiders' purposes, giving them the inside track.
To date, much of the regulatory effort has been aimed at the way corporations seek to defend against the raids. As usual, the Securities and Exchange Commission and the stock exchanges are hung up on some supposed threat to the free market if they put any impediment in the way of corporate takeovers. They have yet to recognize that takeovers themselves are a major threat to the market.
Financier Felix Rohatyn put it succinctly in congressional testimony last year when he said that "tactics used in corporate takeovers . . . create massive transactions that greatly benefit lawyers, investment bankers and arbitrageurs, but often result in weaker companies and do not treat all shareholders equally and fairly."
He added: "I believe we are reaching the point where the integrity of our financial markets is in question and, after all, that has been the basis of our free enterprise system."
Former SEC commissioner A. A. Sommer Jr. speaks of four myths impeding reform:
- That there is a level playing field. Instead, current policy and the nature of the market tilt the game strongly in favor of the raiders.
- That takeovers are good because they boost the target's stock price. This notion ignores how the raiding company's stockholders fare or what the net impact is on companies and the economy.
- That takeovers are needed to root out bad management. It appears that well-run companies are targets as often as not.
- That takeovers assure the most efficient use of corporate resources. Evidence points in the opposite direction. Companies that have been taken over often end up weaker and perform poorly; they wind up with more debt and less permanent capital.
If the market is to continue to attract investment from individuals, then it must be a public market where liquidity--the ability to buy and sell at a relatively stable price--is maintained by an abundance of participants. It should not be the vehicle for professionals to seek substantial influence or control over the affairs of companies.
There would remain ample opportunity for seeking corporate control through agreements reached with management and directors or through a proxy contest, where the attacking group can seek shareholder votes on the merit of the management skills it can bring to the company. That's where the focus belongs, not on offers of quick profit in the stock market.
By permitting professionals to misuse the market, the government and the exchanges are permitting a major distortion of market price-setting. In the past, regulation, even if belatedly, has sought to correct such abuses. After the manipulative practices of the 1920s contributed to the market's collapse, such things as secret investment pools and deliberate camouflaging of trading were outlawed. The speculative excesses of the late 1960s led to further reforms, though once again not before another major collapse.
Today's abuses may not be manipulation in the classic sense. However, raiders are permitted to amass huge positions before disclosure rules take effect and other investors know their true purpose. Because corporations sometimes pay them to back off, raiders often assure themselves of profit whether or not they capture their targets. With the potential takeover aborted, individual investors end up watching the stock plummet.
The time has come to focus on bringing regulation of the market into line with current problems.