What is the Price of Hubris? Using Takeover Battles to Infer Overpayments and Synergies

Abstract

This paper analyzes the amount of information that can be extracted from stock prices around takeover contests. The first part of the paper shows that it is not generally possible to use target and bidder stock price movements to infer the market's estimates of synergies, bidder overpayment, and changes in bidder and target values. In two generic cases, however, we show that it is possible to use bidder and target stock prices to obtain market estimates of overpayment. In the second part of the paper, we illustrate one of these two generic cases through a clinical study of the takeover contest for Paramount. We find that the market estimated that Viacom, the eventual "winner" of the takeover battle, overpaid by over $1.5 billion when it agreed to purchase Paramount in a $9.2 billion acquisition in February 1994. We also find that the market believed that QVC, the eventual "loser" of the battle, had substantially larger synergies (on the order of $1 billion more) with Paramount than Viacom did. Viacom prevailed due to its willingness to over-pay. That this overpayment occurred despite the fact that Sumner Redstone, the CEO of Viacom, owned roughly 2/3 of Viacom supports Roll's Hubris hypothesis (1986) as well as the results in Morck, Shleifer, and Vishny (1990) and Lang, Stulz, and Walkling (1989).