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The Strategic Role of Debt in Takeover Contests

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  • Chowdhry, Bhagwan
  • Nanda, Vikram

Abstract

In a takeover contest, the presence of bidders' existing debtholders, if they can be expropriated by issuing new debt with equal or senior priority, allows bidders to commit to bid more than their valuation of the target. Such commitment can be beneficial because it deters potential entry by subsequent bidders and may allow a first bidder to acquire the target at a bargain price. The cost is that if entry by subsequent bidders does nevertheless take place, because the first bidder has committed himself to bid high premia, a bidding war ensues resulting in offers that may involve excessive premia, i.e., bids that are larger than the bidders' valuation of the target. Copyright 1993 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 48 (1993)
Issue (Month): 2 (June)
Pages: 731-45

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Handle: RePEc:bla:jfinan:v:48:y:1993:i:2:p:731-45

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Cited by:
  1. Bhimani, Al & Hausken, Kjell & Ncube , Mthuli, 2009. "Agent Takeover Risk of Principal in Outsourcing Relationships," UiS Working Papers in Economics and Finance 2009/2, University of Stavanger.
  2. Mueller, Holger M & Panunzi, Fausto, 2003. "Tender Offers and Leverage," CEPR Discussion Papers 3964, C.E.P.R. Discussion Papers.
  3. Matthew J. Clayton & S. Abraham Ravid, 1999. "The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-055, New York University, Leonard N. Stern School of Business-.
  4. Mike Burkart & Samuel Lee, 2010. "Signaling in Tender Offer Games," FMG Discussion Papers dp655, Financial Markets Group.
  5. Fabel, Oliver & Kolmar, Martin, 2002. "Management takeover battles and the role of the golden handshake," Discussion Papers, Series 1 319, University of Konstanz, Department of Economics.
  6. Rajdeep Singh, 1995. "Takeover Bidding with Toeholds: The Case of the Owner's Curse," Finance 9503001, EconWPA.
  7. Dai, Yun & Gryglewicz, Sebastian & Smit, Han T.J. & De Maeseneire, Wouter, 2013. "Similar bidders in takeover contests," Games and Economic Behavior, Elsevier, vol. 82(C), pages 544-561.

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