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Tender Offers and Leverage

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  • Holger M. Müller
  • Fausto Panunzi
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    Abstract

    This paper examines the role of leverage in tender offers for widely held firms. We show that a leveraged "bootstrap acquisition" can implement an outcome that-from an economic perspective-is quite similar to the outcome implemented by the Grossman-Hart dilution mechanism. To raise the funds for the takeover, the raider initially sets up a new acquisition subsidiary that issues debt backed by the target's assets and future cash flows. In the first step of the acquisition, the raider acquires a majority of the target's stock through a tender offer. In a second step, the target is merged with the raider's indebted acquisition subsidiary. The fact that the acquisition subsidiary is indebted lowers the combined firm's share value and thus the incentives for target shareholders to hold out in the tender offer. This allows the raider to lower the bid price, make a profit, and overcome the free-rider problem. © 2004 MIT Press

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    Bibliographic Info

    Article provided by MIT Press in its journal The Quarterly Journal of Economics.

    Volume (Year): 119 (2004)
    Issue (Month): 4 (November)
    Pages: 1217-1248

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    Handle: RePEc:tpr:qjecon:v:119:y:2004:i:4:p:1217-1248

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    Web page: http://mitpress.mit.edu/journals/

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    Web: http://mitpress.mit.edu/journal-home.tcl?issn=00335533

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    Cited by:
    1. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.
    2. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer, vol. 46(2), pages 221-254, February.
    3. Ferreira, Daniel & Ornelas, Emanuel & Turner, John L., 2007. "Unbundling Ownership and Control," CEPR Discussion Papers 6257, C.E.P.R. Discussion Papers.
    4. At, Christian & Morand, Pierre-Henri, 2008. "Jump bidding in ascending auctions: The case of takeover contests," Economics Letters, Elsevier, vol. 99(3), pages 458-460, June.
    5. Daniel Ferreira & Emanuel Ornelas & John L. Turner, 2005. "Ownership Structure and the Market for Corporate Control," IBMEC RJ Economics Discussion Papers 2005-09, Economics Research Group, IBMEC Business School - Rio de Janeiro.

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