Family-owned companies are known to be more risk-averse than many non-family-owned companies. A new study by WHU – Otto Beisheim School of Management – now demonstrates this in an area that has received little research attention to date: takeover premiums. “Takeover premiums of 20 to 30 percent above fair value are normal today,” states WHU Assistant Professor Max Leitterstorf.
Why are takeover premiums inflated? Leitterstorf explains: “It’s not uncommon for executive compensation to rise after a major takeover.” The researcher is aware of many cases in which inflated premiums were paid because the CEO of the acquiring company overestimated his own capabilities. Synergies are overestimated, while risks are underestimated. Together with a co-author, Leitterstorf analyzed 149 takeover offers made between 2004 and 2015 for publicly traded companies listed on the German Prime Standard.
So what are the factors that prevent excessive premiums from being paid? By definition, a supervisory board could actually be a strong regulatory factor. Leitterstorf points out, however, that even this body can overestimate its own influence or seek personal benefits (such as salary or prestige) from a takeover.
A better approach is the concept of an anchor shareholder who holds at least 25 percent of the shares. As the researcher explains, the balance of power between shareholders and the executive board depends in particular on how widely the shares are distributed. As is well known, small shareholders are often not very engaged, and they also lack access to the board of directors.
An anchor shareholder with 25 percent of the voting rights has a much stronger position and thus more influence over the board of directors. This major shareholder can block board decisions if they deem them to be wrong or too risky. In fact, the study found that companies with an anchor shareholder offer, on average, a lower takeover premium than companies without one.
This factor is even more pronounced when a family acts as the anchor shareholder. This is because families often prioritize preserving the company and passing it on to the next generation. From the perspective of family owners, an inflated takeover price could even jeopardize the very survival of their own company. For this reason, owners of family-owned companies view their management’s takeover plans with particular skepticism. For minority shareholders, this means they could factor into their investment decisions the fact that companies with a family as the anchor shareholder are more likely than other companies to avoid offering inflated takeover premiums.
According to another finding of the WHU study, this cautious approach has an even greater impact when the company’s CEO comes from the family.
A particularly recent example of this is the Busch Group’s offer for the TecDax-listed company Pfeiffer Vacuum. Both companies operate in the vacuum industry. The family-owned company is offering 96.20 euros per Pfeiffer share, the company recently announced. This values the TecDax company at approximately 949 million euros. Based on the weighted three-month average, this represents a premium of about 12 percent. The Busch Group, which is led by a family member, does not intend to pay an inflated takeover price.
