November 20, 2019

Does Common Institutional Ownership Deter Competing Bids?

In the era of the index fund, common institutional ownership among large public companies is almost ubiquitous. As I’ve previously blogged, this has raised a number of governance-related concerns, but it seems that common institutional ownership also has a big impact on M&A.  According to a recent study, common ownership among a buyer & its potential competitors substantially reduces the number of competing bids that a target receives:

In summary, we find that the presence of common ownership between the acquirer and potential contesting bidders is negatively associated with the likelihood that the target receives a competing bid. The common ownership effect is highly statistically significant and economically substantial: one common institutional investor lowers the likelihood of bid contest by about 45 percent.

While targets might bemoan the role that common institutional ownership plays in reducing competing bids, the study says that buyers have a lot to cheer about. Common institutional ownership between the acquirer and potential competing bidders is associated with greater synergies & also results in more of those synergies going to the buyer’s shareholders.

John Jenkins