In recent years, extensive evidence has accrued regarding the increasing importance of institutional investors in corporate decisions (Ferreira, Massa, and Matos, 2010; Aggarwal, Erel, Ferreira and Matos, 2011; Helwege, Intintoli, and Zhang, 2012). Unlike individuals, institutional investors tend to own large equity stakes and have a stronger incentive to collect firm-specific information and monitor management. Thanks to the combination of more time, financial training and a fiduciary responsibility towards their own clients, institutional investors play a significant and active role in the corporate governance of firms (Kumar and Lee, 2006; Aggarwal, Erel, Ferreira and Matos, 2011). If they are dissatisfied with a firm’s performance or disagree with the board of directors’ decisions, they can exert pressure by selling their holdings or proactively engaging with management via activist strategies.1
Clearly, the presence of institutional investors does not guarantee activism effectiveness. If the institutional investor holds a relatively small stake in the company (which is likely for diversified mutual funds), the incentive to undertake proactive monitoring may be negligible. At the other extreme, if the institutional investor has a conflict of interest with management or the controlling shareholder, activism is less likely to be desirable or effective because of potential collusionary behavior.
Prior literature has investigated several issues associated with the presence of institutional investors, such as determining the salient firm characteristics that are most attractive to them (Smith, 1996 and Gompers and Metrick, 2001); the effect of institutional investors on firm performance (Brav, Jiang, Partnoy, and Thomas, 2008; Clifford, 2008, Elyasiani and Jia, 2010 and Ferreira and Matos, 2008, Cornett, Marcus, Saunders, and Theranian, 2007; Ruiz-Mallorquí and Santana-Martín, 2011); their impact on the quality of a firm’s corporate governance (Ferreira and Matos, 2008 and Chung and Zhang, 2011); and the role played by institutional investors as facilitators of cross-border M&As (Ferreira, Massa, and Matos, 2010).
With few exceptions, most of the research in this area comes from the US or UK, and little attention has been devoted to other countries or to the actions of institutional investors during important corporate events. We contribute to the existing literature by investigating how institutional investors affect the outcome of public-to-private transactions in an empirical setting where institutions can be the difference between a successful and failed bid. Our dataset comprises the totality of all Italian stock market delisting attempts (both successful and unsuccessful) in the 1998-2012 period.
Italy is a good setting to test the role of institutional investors in going dark transactions. The Italian corporate environment is characterized by firms with highly concentrated ownership structures and/or the presence of a majority shareholder (Faccio and Lang, 2002). The regulatory environment in Italy mandates that minority investors cannot prevent a going dark decision when 90 percent of a company’s existing shares are held by one owner. This means that relevant minority shareholders, holding more than 10 percent of the shares, have the opportunity and power to extract value from potential bidders by refusing to tender their shares for sale. In such circumstances, institutional investors act in minority shareholder interests by pushing up the bid premium or rejecting the bid. This can actively constrain expropriation by the controlling shareholder (Pagano and Röell, 1998), and increase firm value (Maury and Pajuste, 2005).
An example of the role of institutional investors in public-to-private (PTP) transactions is provided by Gewiss SpA (a medium cap firm listed on the Italian Stock Exchange since 1988). On May 28th, 2010, the majority shareholder, who already controlled 75.34 percent of the shares, launched a tender offer with the sole purpose to delist the company. The offer was made at €4.20 per share (embedding a 28 percent premium over the average price for one month before the announcement). At the time of the offer, the second shareholder (with a holding of 7.7 percent) was a US investment management fund, First Eagle Investment Management LLC. First Eagle refused to tender its shares citing an unacceptably low offer price. Because of this, the holdings of the bidder did not reach the required 90 percent threshold and the delisting attempt failed. Eleven months later, the same controlling shareholder launched a second successful tender offer at a higher price (€5.10 per share) for which First Eagle had preemptively agreed to tender its stake. The amount of shares owned by the controlling shareholder reached 95.65 percent and all remaining shareholders were frozen out (that is, forced to sell the remaining shares) prior to delisting.
Consistent with the Gewiss case above, we find new evidence of the role played by institutional investors during tender offers where the purpose of the bid is to delist the firm. We show that institutional investors can increase the probability of bid failure (for instance, by not tendering their shares) or improve the premium paid by the controlling owner. This allows minority shareholders to be better compensated for the value of their tendered shares. Consistent with existing literature (Ferreira and Matos, 2008; Ferreira, Massa, and Matos, 2010; and Aggarwal, Erel, Ferreira, and Matos, 2011), we find these effects are more significant when investors are foreign, independent or activist institutions.
We also contribute to the literature on public-to-private (PTP) transactions. Most research on PTPs originated from the acquisition wave that occurred in the US during the 1980s and late 1990s. Generally, target firms were acquired through leveraged buy-outs where the firm’s delisting was simply a technical effect of the acquisition. Several scholars have attempted to conceptualize the possible rationale for PTP transactions and proposed explanations based on the realignment of interests between shareholders and managers (Kaplan, 1989a); free cash flow (Jensen, 1986); tax shield gains (Kaplan, 1989b); target undervaluation (Lowenstein, 1985); and the improvement of corporate governance (Admati, Pfleiderer, and Zechner, 1994; Maug 1998). Unfortunately, these explanations are not particularly appropriate in countries where highly concentrated ownership structures are dominant.
In Continental Europe, a tender offer accompanied by a freeze-out of minority shareholders is the modus operandi of bidders who wish to take a firm private.2 However, since control is usually already in the hands of the dominant shareholder, there is no need to realign managerial incentives as suggested by Kaplan (1989a). In addition, controlling owners can use financial leverage to manage the agency costs of free cash flow and tax shields. From all the explanations proposed for why firms delist, only undervaluation and corporate governance are likely to be salient factors in Continental Europe. To the best of our knowledge, this paper is the first to consider these issues in an empirical setting.
The paper is organized as follows. The next section presents the theoretical framework. Section 3 provides an overview of the Italian corporate environment and the European takeover directive. In section 4 we describe the research methodology. Section 5 presents our main findings and Section 6 concludes the study.
