Can hedge funds predict takeover offers and outcomes? : the influence of hedge fund ownership on takeover likelihood and offer success

This study investigates the impact of a company's shareholder structure, particularly hedge fund ownership, on its likelihood to become target of a takeover offer. Additionally, it explores the consequences of such an offer within the context of the German takeover market. In line with prior research, we find that the presence of a hedge fund stake increases the likelihood of a firm receiving a takeover offer. However, the underlying reasons for this correlation remain a subject of debate in the academic literature, specifically whether it is due to hedge funds' superior investment strategies, their role as activists, or their access to private information. We find that ownership structure is the primary predictor of takeover activity, while publicly available data offers limited predictive power. These findings, supported by supplementary tests, lend credence to the hypothesis that hedge funds profit from private information. In relation to the outcome of a takeover offer, we observe that unique characteristics of German corporate law, particularly the high level of minority protection, empower hedge funds to employ strategies beyond the conventional speculation on a takeover offer. A prevalent strategy among hedge funds in German takeovers entails the speculation on higher compensation through subsequent structural measures, such as the signing of a domination agreement or a squeeze-out following a successful offer. This creates a particular prisoner's dilemma for hedge funds as target shareholders: to maximize gains, they should refrain from tendering their shares, while other shareholders must tender theirs for the offer to succeed. Our results on the impact of pre-offer hedge fund ownership reflect this tension: we find some evidence of a positive impact on offer success, though this effect becomes insignificant when focusing on conditional offers with a minimum acceptance threshold. Furthermore, our findings imply a negative relationship between pre-offer hedge fund ownership and the offer premium, thereby supporting the view that bidders anticipate hedge funds' low sensitivity to premium increases when deciding whether to tender their shares. In conclusion, our results underscore the growing influence of hedge funds in German takeover offers.