Takeovers under Asymmetric Information: Block Trades and Tender Offers in Equilibrium
I study transfers of control in a rm having atomistic shareholders and one dominant minority blockholder (incumbent). A potential acquirer can try to negotiate a block trade with the incumbent. If the negotiations are successful, the control changes hands via a block trade. If the negotiations fail, the acquirer can launch a public tender offer. According to empirical evidence, companies with minority blockholders are widespread, and both types of transactions occur in such companies. However, the existing models that allow for acquiring control through a block trade never obtain tender offers in equilibrium. In my model, asymmetry of information about the acquirers ability to generate value leads to the negotiations failure and, hence, results in a tender offer for a range of parameters. In such an equilibrium, high ability acquirers take over the rm by means of a tender offer, intermediate types negotiate a block trade, and low types do not attempt any transaction. This result provides an immediate explanation for higher target announcement returns in tender o¤ers as compared to block trades. The model also explains why takeover premiums and targetsstock price reaction to tender offers may be higher in countries with stronger shareholder protection and predicts that better shareholder protection should result in a higher announcements returns for targets in block trade transactions as well. Finally, the paper obtains that transfers of corporate control in rms with a dominant minority blockholder are more efficient when shareholder protection is better and provides an argument against the mandatory bid rule in strong legal regimes.
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