Hostile Versus Friendly Takeovers
The paper analyzes the optimal decision of a raider who can choose between a hostile and a friendly takeover. Empirical evidence shows that the transaction costs of a hostile takeover are much higher than those of a friendly one. The question therefore arises why a raider should ever wish to engage in a hostile takeover. The central argument of the paper rests on the assumption that shareholders have less information about the true value of their firm than the incumbent management. A raider might prefer to make a hostile tender offer directly to the uninformed shareholders rather than negotiating with the informed management even if the transaction costs are higher. The analysis shows furthermore how shareholders can use golden parachutes and poison pills to improve their expected payoffs in a case of takeover.
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