Mike Burkart | Samuel Lee | Paul Voss

The Evolution of the Market for Corporate Control

Jul 23, 2025

Key Takeaways

  • The market for corporate control has shifted from direct hostile takeovers to takeover activism, whereby activist investors push for a sale rather than acquire the firm themselves.
  • This evolution addresses two key frictions in takeovers: the free-rider problem and asymmetric information.
  • Activist hedge funds and private equity now play specialized, complementary roles in facilitating control changes.
  • The shift reflects a more efficient, indirect way to discipline underperforming management—one that dominates the current corporate landscape.

Source Publication: Burkart, Mike, Lee, Samuel, and Voss, Paul (2025), “The Evolution of the Market for Corporate Control.” SSRN Working Paper.

Prize:  The 2025 ECGI Finance Prize for the Best Paper in the ECGI Finance Working Paper Series in 2024

The corporate-takeover landscape has undergone a dramatic transformation since the 1980s. Gone are the days when hostile tender offers dominated headlines. Instead, we have witnessed the rise of a more sophisticated approach: takeover activism—whereby activist shareholders do not acquire companies themselves but orchestrate their sale to outside buyers such as private equity (PE) funds.

The Great Shift

The numbers tell a compelling story. Hostile takeovers peaked in the 1980s but have since declined dramatically, even as the total pool of control-oriented capital has exploded. Activist hedge funds grew from fewer than 10 campaigns in 1994 to around 200 by 2018. Private equity assets under management have similarly skyrocketed. Yet, paradoxically, direct hostile takeovers have become increasingly rare.

The reason is not that disciplinary control changes disappeared; rather, they evolved. Instead of making direct bids, we now see activists taking positions in underperforming companies and then facilitating their sale to PE firms or strategic buyers. Indeed, public-to-private buyouts have surged despite the decline in hostile takeovers.

The Drivers of the Evolution

Why did this shift occur? The answer lies in understanding two fundamental problems that plague corporate takeovers:

    • •     The Free-Rider Problem: When an activist shareholder makes a tender offer, small shareholders have no incentive to sell. They can “free ride” on the activist’s improvements by holding onto their shares and benefiting from the enhanced value. This decision forces the activist to pay a price that already reflects any future value improvements, severely limiting the activist’s profits.
    • •     The Asymmetric-Information Problem: Activists know more about a company’s potential than outside investors. This knowledge creates a “smart buyer” dilemma—high-value targets get acquired at bargain prices, whereas moderate-value targets become unprofitable to pursue.
The Advantage of Takeover Activism

Whereas traditional tender offers suffer from both problems simultaneously, takeover activism elegantly separates them. When negotiating a sale of the firm with an outside bidder, an activist’s superior information poses a problem of asymmetric information, but this bilateral negotiation involves no free riding. Afterward, if the outside bidder must convince the other target shareholders to sell their shares in a second step, a free-rider problem does arise. However, this situation does not involve asymmetric information, because the outside bidder has less information than the activist. This separation allows takeover activism to unlock valuable control changes and enhance efficiency.

Market Evolution in Three Acts

The transformation did not happen overnight. It unfolded in three distinct phases:

    • •     Early Stage (1980s): When control-oriented capital was scarce, the only viable strategy was a direct (hostile) acquisition. This decade was the era of Carl Icahn and Thomas Boone Pickens making headline-grabbing tender offers.
    • •     Transformation Stage (1990s-2010s): As more capital entered the market, specialization emerged. Some investors focused on identifying targets (activist hedge funds) and brokering sales, while others specialized in acquiring them (PE funds).

      This division of labor created powerful complementarities: more activists meant more opportunities for PE firms, and more PE firms made takeover activism more profitable.
    • •     Mature Stage (2010s-present): The market reached a “steady state” with distinct roles. Activists rarely make direct bids anymore but instead focus on putting companies in play for outside buyers.
The Symbiotic Relationship

Today’s market is characterized by a “symbiotic relationship” between activist hedge funds and private equity. As private equity pioneer Thomas H. Lee noted, activists such as “Carl Icahn, Nelson Peltz, Jana Partners, Third Point… are teeing up deals because they’re coming in there and shaking up the management and many times these companies are being driven into some form of auction.”

Beyond Legal Changes

At first glance, one may be tempted to attribute the shift to legal changes. However, the full story is more nuanced. Because of the rise in takeover defenses, hostile takeovers now typically require an initial activism campaign to remove board resistance. However, after weakening the board’s opposition, activists can (and sometimes do) proceed with a hostile takeover offer to acquire the firm themselves. The real drivers of the evolution were the two fundamental frictions of free-riding and asymmetric information. To overcome them, takeover activism and role specialization endogenously emerged, giving rise to a self-reinforcing dynamic whereby success bred more entry, which further favored the takeover activism approach.

Implications for Corporate America

Although hostile takeovers have almost disappeared from the headlines, the market for corporate control has become more efficient at disciplining underperforming management through intermediated control changes. The transformation from high-profile “corporate raiders” to activists represents more than just a change in tactics—it’s a fundamental reorganization of how corporate control is contested and transferred.

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