Takeover defences include all actions by managers to resist having their firms acquired. Takeovers themselves are a form of natural selection where only better performing managers prospers. However, not all takeovers are due to managerial underperformance, Scherer (1998) highlights the importance of stock market valuations which may trigger takeover bids, as a surprise to managers. There can be significant consequences for managerial teams and shareholders, therefore, takeover bid defences have been established to combat these.
In analysing takeover bid defences, it is important to consider the distinction between managers and shareholder interest. Shareholders are primarily concerned with assessing the profitability of their investment. They look for sustainable and consistent growth of their funds and place trust in managerial teams to achieve this. Managers although in place for the benefit of shareholders, can also adopt defences that appear self-serving. Ruback (1987) postulates that managers resist takeovers for three main reasons. Firstly, the belief that the firm has hidden value. Managers of most corporations have private information about the firm's future plans and strategies. When estimating the value of a firm to that of a takeover bid they take into account this information. If the offer price is below the managerial valuation they can oppose the bid in which case benefiting shareholders. .
Secondly, they believe that any resistance will increase the offer price. In tender offers, haggling of the terms usually occurs in the newspapers, circumventing the manager. Takeover defences help the target shareholders by providing an agent that can achieve the best outcome. In some cases the time generated through resistance allows other bidders to compete for price, or most commonly soliciting an offer from a "white knight. This is consistent with evidence found by Kim (1986) who finds that stockholder gains are substantially greater when there are multiple bidders.
