Working Paper: CEPR ID: DP3964
Authors: Holger M. Müller; Fausto Panunzi
Abstract: We examine whether, and why, it matters how tender offers for widely held firms are financed. If tender offers are financed with debt, the positive effect of a synergy gain or value improvement on the combined firm?s equity is partly offset by the simultaneous increase in debt. Dispersed target shareholders then only appropriate part of the value improvement, which mitigates the free-rider problem. Bankruptcy costs, incentive problems on the part of the raider, and defensive leveraged recapitalizations and asset sales by the target management are all counter-forces to high bidder leverage, thereby shifting takeover gains to target shareholders and causing takeovers to fail. While bankruptcy costs are a social cost, the takeover premium is merely a wealth transfer between the raider and target shareholders. As the raider does not internalize this, they use too much debt relative to the social optimum.
Keywords: freerider problem; leverage; tender offers
JEL Codes: G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financing method (debt) (G32) | outcomes of tender offers (G34) |
| debt (H63) | distribution of value improvements among shareholders (G35) |
| high bidder leverage (D44) | takeover gains to target shareholders (G34) |
| high bidder leverage (D44) | potential takeover failures (G34) |
| bankruptcy costs (K35) | likelihood of successful takeovers (G34) |
| raider's incentive problems (D82) | likelihood of successful takeovers (G34) |
| defensive actions by target management (G34) | likelihood of successful takeovers (G34) |
| leverage (G24) | takeover premium dynamics (G34) |
| raider does not internalize full costs of bankruptcy (G33) | over-leverage relative to social optimum (D61) |