Signaling in Tender Offer Games

We examine whether a bidder can use tender offer terms to signal post-takeover security benefits. Neither restricted bids nor cash-equity offers allow the bidder to reveal private information. Since atomistic shareholders extract all the gains in security benefits, signaling equilibria are subject to a constraint that is absent from bilateral trade models: The bidder must enjoy gains from trade that are excluded from bargaining (private benefits) but can nonetheless be relinquished. Dilution, debt financing, and toeholds are viable signaling devices because they imply private benefits that depend on security benefits in a predictable manner. In these signaling equilibria, lower-valued types must forgo a larger fraction of their private gains, and these costs can prevent some takeovers. Strikingly, the separation of cash flow and voting rights overcomes the asymmetric information problem. Offers that include derivatives allow for a complete separation and can therefore implement the symmetric information outcome.