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Tender Offers and Leverage

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  • Holger M. Müller
  • Fausto Panunzi

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.

Suggested Citation

  • Holger M. Müller & Fausto Panunzi, 2004. "Tender Offers and Leverage," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1217-1248.
  • Handle: RePEc:oup:qjecon:v:119:y:2004:i:4:p:1217-1248.
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    File URL: http://hdl.handle.net/10.1162/0033553042476198
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    Cited by:

    1. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(2), pages 221-254, February.
    2. 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.
    3. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.
    4. Mike Burkart & Denis Gromb & Holger M. Mueller & Fausto Panunzi, 2014. "Legal Investor Protection and Takeovers," Journal of Finance, American Finance Association, vol. 69(3), pages 1129-1165, June.
    5. Bo Becker & Jens Josephson, 2016. "Insolvency Resolution and the Missing High-Yield Bond Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2814-2849.
    6. 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.
    7. Marc Martos-Vila & Matthew Rhodes-Kropf & Jarrad Harford, 2013. "Financial vs. Strategic Buyers," NBER Working Papers 19378, National Bureau of Economic Research, Inc.
    8. João Teixeira, 2014. "Outsourcing with debt financing," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 13(1), pages 1-24, April.
    9. Daniel Ferreira & Emanuel Ornelas & John L. Turner, 2015. "Unbundling Ownership and Control," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(1), pages 1-21, March.
    10. repec:oup:rcorpf:v:1:y:2012:i:1:p:1-27. is not listed on IDEAS
    11. Mike Burkart & Samuel Lee, 2015. "Signalling to Dispersed Shareholders and Corporate Control," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 922-962.
    12. repec:eee:jfinec:v:126:y:2017:i:3:p:614-634 is not listed on IDEAS

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