Review of Industrial Organization 12: 579–591, 1997.c 1997 Kluwer Academic Publishers. Printed in the Netherlands.

The Characteristics of Takeover Target Firms: TheCase of the English Brewing Industry, 1945–1960

ALISON DEAN�

Strategy and International Business Group, City University Business School, Barbican Centre,London EC2Y 8HB, U.K.

Abstract. The paper examines if takeovers target the “correct” firms. Using the English brewingindustry (1945–1960) as a case study, size and conventional performance criteria of taken-over,independent and merging firms are assessed, and shown not to be valid target indicators. Comparisonof a real estate/property utilization parameter – average asset value per “tied house” – for each firmcategory, shows that taken-over firms have the lowest average asset value per tied house. Low averageasset value per house characterizes firms which, by failing to optimize their property assets, are poorperformers. Takeover therefore, in this case, targets the “correct” firms.

Key words: English brewing industry, property, takeover targeting.

I. Introduction

There are many reasons for takeover and much of the analysis of takeovers concen-trates on those reasons. An important question however is – “Do takeovers targetthe “correct” firms, particularly in times of change?” 1945–1960 was a period ofconsiderable change in post-war Britain which saw reconstruction and reposition-ing of many industries. The economic environment was much changed from thatof the pre-war era and in particular the value of property and land was escalatingrapidly. The present paper considers if takeover targeting was performance relat-ed or whether other factors, specifically industry’s relationship to the burgeoningproperty market was of equal or greater significance and if the correct firms weretargeted.

A takeover or acquisition occurs when one company secures effective control ofanother by its purchase from the shareholders. A merger occurs when two or morecompanies agree to join forces to form a new company, with control shared betweenthe former separate companies. Determination of whether an amalgamation is atakeover, or a merger, is not always straightforward. The presentation and form isoften dictated by financial and administrative considerations and can depend onthe social acceptability of one form over the other (Singh, 1971, p. 1; Krekel et al.,

� I thank William G. Shepherd for his comments and suggestions on this paper and its earlierdrafts. I gratefully acknowledge the helpful comments of Carol Heim, Michael Best and RobertHopley on earlier drafts, of my colleagues at City University Business School, and of the anonymousreferees.

580 ALISON DEAN

1969, p. 6; Sawyer, 1985, p. 208; Cosh et al., 1980, p. 229). The literature tends touse the two terms interchangeably, but here the above distinction is applied whereascertainable.

Takeover and merger literature tends to focus on motives for amalgamation,rather than target characteristics (see for example, Cook and Cohen, 1958; Cooke,1986; Sawyer, 1985). Rationale for amalgamation is developed from the viewpointof the acquirer, and is seen as a means of gaining “improvement” be it in profit,growth, or market power.1 From the standpoint of the acquired firm reasons foramalgamation are interpreted as failure to achieve adequate profit, growth, ormarket power. Profit- and growth-maximization theoretical approaches predict thatthe acquired firm will have below average performance for the industry. Threatof acquisition ensures firms pursue profit maximization and greater efficiency(Sawyer, 1985, p. 214; Hindley, 1973, p. 23). Acquisition is, by implication, thepenalty for poor performance.2

However, the evidence on the characteristics of takeover targets presented isless than enthusiastic in supporting this position. Some authors have found that therelationship between performance and takeover is, at best, weak (Scherer, 1980,pp. 37–38; Herman and Lowenstein, 1988, pp. 211–240), and others that there isno statistically significant difference between taken-over and not taken-over firms(Singh, 1971, 1975; Meeks, 1977). Even those who have been able to distinguishtarget firms on the basis of performance could only do so in the case of hostiletakeovers (see, for example, Mørck et al., 1988, pp. 102–103). Empirical studies(Meeks, 1977; Kuehn, 1975; Singh, 1971; Mueller, 1980) suggest that at least interms of performance it is difficult to identify, at the industry level, firms vulnerableto takeover. According to Meeks (1977, pp. 20–21), “the takeover mechanism doesnot appear to have singled out the unprofitable as victims”. Performance indicatorsare more likely to single out acquiring firms than targets.

Some authors, Singh (1971, p. 58), Meeks (1977, p. 19), Scherer (1980, p. 38)and Herman and Lowenstein (1988, p. 221), point to a relationship between sizeand takeover. Singh and Meeks both find small size rather than low profitabilitya distinguishing characteristic of U.K. manufacturing firms which were takeovertargets. The possibility of size as a distinguishing characteristic of takeover targetsis considered later in this paper.

In this paper performance indicators (used as a measure of firm success) of thebrewing industry are examined to determine if takeover targeting was related tofirm performance or to other distinguishing characteristics. Firms’ characteristicsare classified according to the two polar cases of taken-over firms and those which

1 Both firms involved may be driven by such motives. One or both may believe that by synergy,greater profitability (or growth) could be attained by the two firms in combination rather thanindividually. A synergistic takeover may enable a firm to fulfill otherwise unattainable objectives,benefitting the seller as well as the buyer (Scherer, 1980, p. 128; Scherer and Ross, 1990, p. 163;Hawkins and Pass, 1979, p. 67).

2 Scherer and Ross (1990, p. 171) suggest however, there is little evidence to support this view,rather, target firms are those which fail to improve their superior performance.

THE CHARACTERISTICS OF TAKEOVER TARGET FIRMS 581

remained independent throughout the period. The hybrid case of merging firms isalso considered.

II. The English Brewing Industry

The years from 1945–1960 were a period of considerable restructuring within theEnglish brewing industry which paved the way for the well-documented takeoveractivity of 1960 onwards. The brewing industry in England and Wales holds a largeproportion of its assets as real estate, mostly tied and managed public houses andoff-licenced premises, but also agricultural land, e.g., hop gardens. The tied estate,the public houses which the brewer owns, is the main distributional outlet for hisproduct. These houses are let on condition that the tenant purchases beer, and inmany cases other liquor and soft drinks, solely from the brewer. The relationshipof the brewing industry to the property market, via ownership of the retail outletsfor beer, is well understood, as is its traditional role in the commercial expansionof brewing companies. The role of property, independent of beer distribution, as aresource tradeable in its own right however, is less well recognized. This aspect ofbrewers’ property came very much to the fore in the 1950s and the impact it hadmakes the brewing industry takeovers of the period worthy of a new analysis.

The English brewing industry of the period was dominated by family-run,family-owned firms.3 Whilst a family firm might be a poor performer, takeovermay not be a threat as the risk of acquisition is partially dependent upon theavailability of its shares. It will not be vulnerable to takeover unless its control overits shareholders, often the family, is weak and/or the dispersal of its shares broad.4

Apparently poor performance by a family firm may not be real since the family’sbusiness objectives may not be reflected solely in the performance figures. Forexample, returns to family members, may be as payments to board members (andso prior to profit being calculated), rather than as dividend payments. Because of theproblems of assessing family firm performance only publicly quoted companiesare used in the sample as such firms have to comply with laws governing theoperation of public companies. These include for example, the 1948 CompaniesAct which laid down stringent requirements for company accounts and reports, sogreatly improving the quality of information available to shareholders and potentialinvestors.

In the English brewing industry, Vaizey (1960, p. 151) and Jones and Cockerill(1984, pp. 206–207) support the view that small, rather than the less profitablefirms, were vulnerable to takeover.

3 For a detailed discussion of the distinctiveness of the family business see P. Leach (1991, pp.3–24). The ethos of the family brewing firm is well-described by B. J. Gillham (1991, p. 3).

4 Gourvish and Wilson (1994, pp. 484–496) emphasize family determination to remain inde-pendent in addition to high-quality management and financial control as essential in withstandingacquisition.

582 ALISON DEAN

III. Performance Criteria

Accounting data, despite their limitations for assessing firm performance, remainthe most detailed information available on which to base a comparative studyof firms. These financial data were available at the time (1945–1960) and wouldhave formed part of the initial information used by potential acquirers to assessthe attractiveness of potential acquirees (if such an assessment were performancebased), and so are valid to use for assessment of firm performance.

The performance criteria considered were profitability, earnings, dividend pay-ments and cover, and liquidity. A firm’s performance may be assessed relative toits own past performance and/or to the performance of other firms in the industry.A firm which neither meets its own past performance nor the industry average is apoor performer and may be deemed a “less successful” firm.

1. PROFITABILITY

The manner in which financial data were presented in company reports and inthe investment press of the time has meant that the two most precise measuresof profitability, the ratio of operating profits to capital employed and earningson equity, cannot be applied. However, an alternative indicator of profitability,consolidated net profit after tax as a percentage of capital employed, was assessed.A sample of 24 companies (accounting for 47 percent of total industry net profitearned by publicly quoted brewing companies in 1949) was taken in two years, atthe start and end of the period, i.e., 1948/1949 and 1958/1959.5

In 1948/1949 the average rate of return for all companies was 4.29 percent. Theaverage rate of return for merging companies was 3.63 percent, for taken-over com-panies 4.1 percent and for those which remained independent 5.15 percent.6 Thedifference between the average rates of return of the independent and taken-overcompanies is not statistically significant.7 However, the differences in the standarddeviations of the rates of return of the merging and independent companies and ofthe merging and taken over companies are significantly different.8 In 1958/1959the average rate of return for all companies was 5.15 percent. The average rate ofreturn of merging companies was 4.51 percent, of taken-over companies 3.6 per-

5 The 24 companies were Ansells, Bass, Charrington, Courage, Guinness, Ind Coope, Mitchellsand Butlers, Watney, Whitbread, Bents, Bentley’s, Brickwoods, M. Brown, W. Butler, Cornbrook,Cameron, Groves and Whitnall, Hammonds, Hewitts, Hope and Anchor, Masseys, J. Smith’s, Strongs,Tetleys. Source: Hawkins (1978, pp. 120–121).

6 The variance for merging companies is 0.23, for taken-over companies, 0.9 and for independentcompanies 2.67.

7F� = 2.43 where F = 8.8. t = 0.112 with 13 degrees of freedom.

8 In the first case F � = 11.43 where F = 3. In the second case F � = 4.69 where F = 4.07.

THE CHARACTERISTICS OF TAKEOVER TARGET FIRMS 583

cent and of independent companies 5.31 percent.9 The differences in the averagerates of return between the three groups are not statistically significant.10

2. EARNINGS

Earnings accruing to equity capital, expressed as a percentage of equity sharecapital, was used as a measure of earnings on equity. It should be noted that thisratio will be larger than that of the rate of return on equity capital since reservesare excluded. Charts showing the annual distribution of earnings/share capitalpercentages were constructed from the data on earnings/brewery company sharecapital published in The Investors’ Chronicle during the period 1945–1960. Thedistributions are broadly similar across the years and for individual companies thefluctuation in earnings/share capital is relatively small. Comparison, by observation,of the distribution of earnings/share capital percentages of amalgamating firmswith that for all firms in the sample shows them to be similar.11 When firms aresubdivided into high, medium and low earners, the relative proportions of thosetaken-over, merging or remaining independent are similar to the sample as a whole.

3. DIVIDENDS

Dividend payments on ordinary shares expressed as a percentage of the par valueof issued equity capital for a sample of brewery companies drawn from the StockExchange Official Year-Book as above, 1945–1964, were examined.12 Dividendpayments are more an indicator of how a firm wishes its performance to be perceivedthan of performance per se, and therefore would be expected to remain fairly stableyear on year. Examination of a sample of 150 brewery companies supports this.A comparison of the dividend performance of taken-over and independent firms,based on data from the Stock Exchange Official Year-Book shows that there wasno statistically significant difference between the average dividend payment of thetaken-over firms (16 percent) and that of the firms which remained independent (17percent). Similarly, comparison of the average dividend of the merging firms (16percent) and that of the independent and taken-over firms revealed no significantdifference in mean dividend payments.13

9 The variance for merging companies is 1.22, for taken-over companies 0.34 and for independentcompanies 2.88.

10 Comparing merging and taken-over firms F � = 3.04, F = 8.85, t = 1.44 with 11 degrees offreedom. Comparing merging and independent firms F � = 2.32, F = 3.35, t = 1.15 with 18 degreesof freedom. Comparing taken-over and independent firms F � = 7.04, F = 8.79, t = 1.84 with 13degrees of freedom.

11 Comparison was made by observation because the availability and nature of the data did notpermit statistical analysis.

12 Source: The Secretary of the Share and Loan Department of the Stock Exchange, ed, 1945–1964.13 The samples comprised 47 taken-over firms, 46 independent firms and 19 merging firms. The

variance of taken-over firms was 20.64, of independent firms 22.85 and of merging firms 51.7.Comparing taken-over and independent firms F � = 1.08, F = 1.69, t = 1.65 with 90 degrees of

584 ALISON DEAN

A better indication of company performance is given by dividend cover, the ratioof earnings per share and ordinary dividend per share, which was again calculatedfrom data on publicly quoted brewery companies published in The Investors’Chronicle. The average cover for brewery companies in the period 1950–1960 was1.92, in a range of 1.74 (1953) to 2.04 (1958).14 Analysis of dividend cover datapublished in The Investors’ Chronicle indicates that as many merging and taken-over firms had higher than average as had lower than average cover. Independentfirms tended to have higher than average cover.

Dividend yield, the ratio of current dividend per ordinary share to market priceper share, measures the rate of return on shares at their current purchase price ratherthan on their nominal value. The average annual dividend yield of brewery sharesexceeded that of all industrial shares, 1949–1958, reflecting both that brewery shareprices were low relative to the all-industry share price average and their downwardtrend. Examination was made of the brewery dividend yields for 92 brewery com-panies reported in The Investors’ Chronicle, 1948–1960, and comparisons madeof the fates of those companies with consistently higher than average yields andthose with consistently lower than average yields. (A much smaller proportion ofthe sample fell into the latter category, reflecting the aim of The Investors’ Chron-icle to identify good investment prospects.) In each case approximately the sameproportion were taken-over as merged or remained independent.

4. LIQUIDITY

The best measure of liquidity which could be constructed from published companyfinancial data was the current ratio, the ratio of current assets to current liabilities.The current ratio was calculated for a sample of brewery companies on which therelevant data was available, taken from the Stock Exchange Official Year-Book.15

Comparisons were made of the current ratios of firms taken over, merging andremaining independent during the period. The average current ratio for independentcompanies in the sample was found to be 1.684, for the taken-over companies 1.648,and for the merging companies 1.512.16

freedom. Comparing merging and independent firms F � = 1.22, F = 1.75, t = 0.94 with 14 degreesof freedom. Comparing merging and taken-over firmsF � = 1.64, F = 2.04, t = 0.24 with 68 degreesof freedom.

14 This compares with an average for all industrials of 2.78 in a range of 2.32 (1960) to 3.54 (1952)in the same period. Source: ‘Trend of Industrial Profits’, 1951–1961.

15 49 independent companies, 34 taken-over companies and 8 merging companies.16 The variance of the independent companies was 0.41, of the taken-over companies 0.63 and

of the merging companies 0.05. Comparison of the mean and variance of each group indicates thatthere was no statistically significant difference between the independent and taken-over groups (F � =1.61, F = 1.74, t = 0.02 with 76 degrees of freedom). However the variance of the group of mergingfirms was lower and significantly different from that of the other two groups. Comparing the mergingand independent companies, F � = 7.16, F = 3.3. Comparing the merging and taken-over companiesF� = 11.14, F = 3.3.

THE CHARACTERISTICS OF TAKEOVER TARGET FIRMS 585

Table I. Comparison of performance characteristics

Performance criteria Taken-over firms Independent firms Merged firms

Profitability 1948 not significantly not significantly significantly differentdifferent from different from distribution from bothindependent firms taken-over firms other groups with lower

mean net profit aftertax/capital employed

1958 not significantly not significantly not significantlydifferent from other different from other different from othertwo groups two groups two groups

Percentage earnings observed distribution observed distribution observed distributionon share capital similar to that of similar to that of similar to that of(comparison by other two groups other two groups other two groupsobservation)Dividend payment not significantly not significantly not significantly

different from other different from other different from othertwo groups two groups two groups

Dividend cover as many had higher than more had higher than as many had higher thanaverage cover as had average cover than had average cover as hadlower than average cover lower than average cover lower than average cover

Dividend yield no correlation no correlation no correlationLiquidity not significantly not significantly significantly different

different from different from distribution from bothindependent firms taken-over firms other groups with lower

mean current ratioShare price/net asset not significantly not significantly not significantlyvalue per share different from different from different from other

other two groups other two groups two groups

Comparison of the performance characteristics of each of the three groups offirms, taken over, independent and merging are summarized in Table I.17 Takentogether the five parameters, i.e., profitability, earnings/share capital, dividendpayment, dividend cover and liquidity, provide a measure of the performance orrelative success of a firm and an indication of the sustainability of its position.

Taken-over brewing firms were as profitable, on average, as firms which remainedindependent. They were not concentrated at the lower end of the earnings/sharecapital scale but showed a similar earnings spread as the sample of all brewingfirms. There was no significant difference in the average dividend payment or thecurrent ratio, of firms taken over and those remaining independent. On the basisof these performance criteria, the taken-over firms were as “successful” as thosewhich remained independent. Some “successful” firms were taken over, others were

17 Taken-over firms are not subdivided according to whether they are the subject of hostile orfriendly takeovers but treated as one grouping.

586 ALISON DEAN

not. This is consistent with and supports the findings of the majority of authorswho have examined takeovers in other industries: there is no strong evidence of arelationship between performance and takeover.

IV. Distinguishing the Taken-over Firm

Performance alone is not an adequate indicator of a firm’s vulnerability to takeover;other factors have to be considered. For example, the extent to which share priceundervalued stated book value may have been a factor leading to vulnerability.However, when this was examined for a sample of firms, there was no significantdifference between taken-over, independent or merging firms in the extent to whichtheir share price undervalued their book value.18

Singh (1971, p. 58), Meeks (1977, p. 19), Mueller (1980, pp. 301–302) andScherer (1980, p. 38), have pointed to size as a contributory factor in takeovers.The size of the target firm will affect the ability of an acquirer to accomplish atakeover. Generally, the larger the book value of the target firm’s total assets (andhence the greater the value of a controlling volume of shares), the greater thepurchasing power of the acquirer has to be to fund the takeover. The larger thetarget, the smaller is the pool of potential acquirers and the more likely it is thatamalgamation will occur via amicable merger (see below). Such amalgamations areeffected by an exchange of shares in the new company for those of the componentcompanies in proportion to the relative value contributed by each company to thenewly formed company.

In the case of the brewery company two different measures of size, total assetsand size of tied house estate, may be applied.19 A sample of brewery firms for whomdata was available on the number of houses held and the total asset value was taken.It consisted of 29 independent firms, 36 taken-over firms and 12 merging firms. Datafor taken-over and merging companies were taken at the time of amalgamation.Data for companies remaining independent throughout 1945–1960, were taken atthe end of the period. 20 Comparison of the three groups, taken-over, independent

18 Data provided by The Investors’ Chronicle for the period comparing Brewery Company SharePrice and Net Asset Value was considered. The sample comprised 10 percent of the firms in theindustry. The mean share price to net asset value per share was calculated for each category of firm.The mean value for independent firms was 0.808 (variance 0.096), for merging firms 0.841 (variance0.033), and for taken-over firms 0.822 (variance 0.048). The differences between the means of thegroups are not statistically significant at the 5 percent level. Comparing independent and mergingfirms F � = 2.77, 2.94 < F < 3.01, t = 0.294 with 27 degrees of freedom. Comparing independentand taken-over firms F �= 1.93, 2.77 < F < 2.85, t = 0.12 with 28 degrees of freedom. Comparingmerging and taken-over firms F � = 1.44, F = 3.14, t = 0.21 with 19 degrees of freedom.

19 The tied house estate of a brewing company comprised those public houses owned by the brewerywhere the tenancy agreement required the tenant to buy his/her beer only from his brewer landlord.

20 Source: The Secretary of the Share and Loan Department of the Stock Exchange, ed, 1945–1964.Data on the number of houses held are not readily available as this is often considered sensitive databy brewing firms. However, for companies which did make this information available, the numbersappear to have been relatively stable throughout the period, except in the case of firms involved in

THE CHARACTERISTICS OF TAKEOVER TARGET FIRMS 587

Table II. Comparison on the basis of size

Size Taken-over firms Independent firms Merged firms

Total assets significantly differentdistributionfrom other two groupswith lowest mean totalasset value

significantly differentdistribution from oth-er two groups

significantly differentdistribution from oth-er two groups withhighest mean totalasset value

Number of houses not significantly dif-ferent from indepen-dent firms

not significantly dif-ferent from take-overfirms

significantly differentdistribution from oth-er two groups withhighest mean numberof houses

Relationship TotalAssets = a + b (hous-es) (In each case theestimate of a was notsignificant while thatof b was)

significantly differentfrom that of eachof the other groupswith a lower “House”coefficient

significantly differentfrom that of the taken-over firms, with ahigher “House” coef-ficient; not signifi-cantly different fromthat of the mergedfirms

significantly differentfrom that of the taken-over firms, with ahigher “House” coef-ficient; not signifi-cantly different fromthat of the indepen-dent firms

and merging firms, was made on the basis of tied estate size and total asset value.The results are summarized in Table II.

There was no difference in the average estate size of taken-over and independentfirms.21 However, merging firms had, on average, a larger estate than firms inthe other two groups.22 With regard to total asset value, whilst the results areinconclusive on the difference in size between the taken-over and independentfirms, merging firms were clearly much larger.23 (The taken-over firms had thelowest mean total asset value, the merging the highest.) This supports the viewindicated above that where large companies are involved, amalgamation is morelikely to occur via merger than takeover. The group of taken-over firms comprised

large scale expansion. Similarly, given the infrequency with which assets were revalued by brewerycompanies, changes in total assets throughout the period are not large.

21 The mean number of houses held by independent firms was 358 (variance = 104313, medi-an = 194) and by taken-over firms was 277 (variance = 74650, median = 165). Variance ratio and“Student’s t” tests revealed that there was no statistically significant difference between the means ofthese two groups. F � = 1.41, 1.74 < F < 1.89, t = 1.08 with 63 degrees of freedom.

22 The mean number of houses held by merging firms was 769 (variance = 226626, median = 606).Variance ratio tests revealed that the merging firms had a significantly different distribution fromthe other two groups. Comparing merging and independent firms F � = 2.29, 2.09 < F < 2.24.Comparing merging and taken-over firms F � = 3.22, 2.02 < F < 2.16.

23 The variance ratio test revealed a significant difference in the distributions of all three groups.The merging companies had the highest mean asset value (£12.4m) (variance = 5.813� 1013, median= £8.46m), the independent firms a mean asset value of £3.8m (variance = 1.844 � 1013, median =£2.41m), and the taken-over firms a mean asset value of £2.1m (variance = 3.978� 1012, median =£1.32m). Comparing the merging and independent firmsF � = 3.23, 2.09 <F < 2.24. Comparing themerging and taken-over firms F � = 15.5, 2 < F < 2.16. Comparing the independent and taken-overfirms F � = 4.79, 1.74 < F < 1.89.

588 ALISON DEAN

firms with a lower mean total asset value than the other two groups. The meannumber of houses per firm however was not significantly different from that of theindependents. The average asset value per house (total assets/number houses) ofthe group of taken-over companies was lower than that of independent companiessuggesting that this, rather than size per se, was an important factor in vulnerabilityto takeover.

The hypothesis is that firms with a low average asset value per house werevulnerable to takeover. The low average asset value per house is indicative of afailure to realize the potential of the property market and the advantages to begained from good property management. This failure made firms vulnerable toother companies who could better manage the estate in the retailing of beer and/orby putting property to alternative uses where that would yield a higher return.

To test the hypothesis that low average asset value per house was a distin-guishing characteristic of taken-over firms, the “Total Assets: Number of Houses”relationship was compared across the three groups: taken-over, independent, andmerging firms. This was done to determine if there was a significant differencein the relationship of a taken-over brewing company to its property, from that ofan independent company or merging company and its property. Within the threegroups, for each firm the “Number of Houses, Total Assets” data pair was usedrather than a simple average Total Assets/Number of Houses calculated for eachgroup as a whole. The statistical significance of differences in the group relation-ships and coefficients was tested. For the same sample of firms as above, lines ofbest fit were calculated for the relationship for each group.

It was found that the group of taken-over firms had a lower “house” coeffi-cient than the independent and merging groups.24 (If outliers are excluded, thedifference in “House” coefficients still remains. Thus the difference in relationshipdoes not depend on a few outlying members of the sample, for example, thosetakeover targets with more than 800 houses.) Chow tests showed that the “TotalAssets : Number of Houses” relationship was significantly different for the taken-over and independent groups and for the taken-over and merging groups but notfor the independent and merging groups.25 It may be concluded that a low “house”coefficient is a group characteristic of taken-over firms. At the individual firm levelmembership of the group, and hence vulnerability to takeover, is implied by a lowaverage asset value per house.

24 Least squares lines of best fit were calculated using the equation Total Assets = a + b (Houses).For the sample of 29 independent firms a� = �447710, b� = 11966.22, r-squared = 0.789. For thesample of 36 taken-over firms a� = 269469.7, b� = 6617.2, r-squared = 0.822. For the sample of 12merging firms a� = 1672863, b� = 11374.64, r-squared = 0.504. Standard error tests indicate that ineach case the estimate of the intercept is not statistically significant but that of the slope coefficientis. Note also that in the case of merging firms the r-squared is relatively low compared with the othertwo cases, thus the value of total assets is less well explained by the number of houses in this instancethan in the other two.

25 Comparing the taken-over and independent groupsF � = 11.95, F = 3.15. Comparing the taken-over and merging groups F � = 7.55, 3.15 < F < 3.23. Comparing the independent and merginggroups F � = 0.88, 3.23 < F < 3.32.

THE CHARACTERISTICS OF TAKEOVER TARGET FIRMS 589

The overall average asset value per house of the taken-over firm group was£7,591, of the independent firm group £10,717, and of the merging firm group£13,551. The firm average asset value per house for taken-over firms was £8,840,for independent firms was £11,633, and for merging firms was £15,452.

V. Conclusions

On the basis of the data analyzed here, low average asset value per house is adistinguishing characteristic of vulnerability to takeover. It also distinguishes thetaken-over firms from the merging firms, providing a further basis for more precise,distinctive definitions of the two types of amalgamation. Further, it suggests thatthe literature needs take more care in its use of the terms and that they cannot beused interchangeably.

Consideration of performance alone fails to distinguish firms vulnerable totakeover. The evidence examined does suggest however that vulnerable firms aredistinguishable by a low average asset value per licensed house and, as a group, by asignificantly different relationship, Total Assets = a + b (Houses), from independentand merged firms. Low average asset value per house and a low “House” coefficientof taken-over firms should not be confused with small size. A firm may be small,i.e., have a small number of houses and a modest total asset value, and yet itsaverage asset value per house be high. Taken-over firms were not distinguishablefrom firms which remained independent on the basis of size. Taken-over firms aredistinguishable in that the asset value per house is low compared with that of anindependent or merging firm of similar size.

Firms with a low average asset value per house and, at group level, a low“House” coefficient, it can be argued, made least effective use of the propertymarket to support their activity in the beer market. The “House” coefficient maybe regarded, therefore, as a measure of the extent to which firms used the propertymarket to support their beer market activities (assessed by the value of their totalassets). A low “House” coefficient indicates little effective use of property.

1. TAKEN-OVER FIRMS

Taken-over firms’ low “House” coefficient is indicative of a low average total assetvalue per house, in other words, a low valued estate. This arises because either (a)the estate is poorly located or of low quality and therefore its potential revenue, itsresale value and/or alternative use value are low, or (b) the estate portfolio is poorand has not been adjusted to improve revenues or to exploit alternative use values.In both cases the indications are of poor property management and a failure toexploit fully the opportunities of the property market and the strengths it can offer.

590 ALISON DEAN

2. INDEPENDENT AND MERGING FIRMS

For independent and merging firms, the total asset value: number of houses rela-tionship was not significantly different, i.e., the average asset value per house wasnot significantly different. There was therefore no advantage to an independentor merged firm to consider takeover of another from these two groups since theacquired property would not be a bargain vis-a-vis its own. Independent and merg-ing firms were able to bargain the terms of a proposed amalgamation which if it didoccur, took the form of a merger. Merged firms may be understood as a combinationof two independents of equal bargaining power and with estates of equal averageworth. Hence although the merged firms had a higher mean total asset value and alarger number of houses, the relationship of total asset value to number of houseswould not be expected to differ significantly from that of the independent firms.

Explanation of the higher “House” coefficient may be made as follows. Firmswhich had good opportunities in and made good use of the property market andmanaged their property well, would be expected to achieve a property portfoliowith a higher total asset : house ratio. Better use of the property market couldprovide firms with additional power to strengthen their position in the beer market,thereby reducing vulnerability to takeover and increasing chances of survival.

It is concluded that taken-over firms in the English brewing industry are distin-guishable, not by conventional performance indicators or by size per se, but by alow average asset value per house and a low “House” coefficient. In other words,taken-over firms were those with a relatively low valued estate. The usual measuresof performance success fail to identify taken-over or vulnerable firms. They arehowever identifiable by their low average asset value per House which indicatesthat they were the less successful in the management of their property/estates. Itwas in this way that takeover targeting eliminated firms failing to make adequateuse of their resources and so targeted the “correct” firms.

References

Brewery Company Annual Reports (1944–1958, 1960–1963) Stock Exchange Company AnnualReports. London: Guildhall Library.

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