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Takeover Bids below the Expected Value of Minority Shares

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  • Lucian Arye Bebchuk

Abstract

Focusing on takeover bids whose outcome can be predicted in advance with certainty, Grossman and Hart established the proposition, which subsequent work accepted, that successful bids must be made at or above the expected value of minority shares. This proposition provided the basis for Grossman and Hart's identification of a free-rider problem and became a major premise for the analysis of takeovers This paper shows that this important proposition does not always hold once we drop the assumption that the only successful bids are those whose success could have been predicted with certainty In particular, it is shown that any unconditional bid that is below the expected value of minority shares but above the independent target's per share value will succeed with a certain positive probability, that the bidder's expected payoff from such a bid (not counting the transaction costs of making the bid) is always positive; and that bidders might elect to make such bids. These results have implications for the nature of the free-rider problem and for the operation of takeovers; in particular, it is shown that, when a raider can increase the value of a target's assets, the raider might elect to bid even if no dilution of minority shares is possible and it holds no initial stake in the target

Suggested Citation

  • Lucian Arye Bebchuk, 1988. "Takeover Bids below the Expected Value of Minority Shares," NBER Working Papers 2524, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2524
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    References listed on IDEAS

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    1. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    2. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
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    Cited by:

    1. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    2. Matthias Kiefer & Edward Jones & Andrew Adams, 2016. "Principals, Agents and Incomplete Contracts: Are Surrender of Control and Renegotiation the Solution?," CFI Discussion Papers 1603, Centre for Finance and Investment, Heriot Watt University.
    3. Francesca Cornelli & David D. Li, "undated". "Risk Arbitrage in Takeovers," Rodney L. White Center for Financial Research Working Papers 17-98, Wharton School Rodney L. White Center for Financial Research.
    4. Cornelli, Francesca & Li, David Daokui, 1998. "Risk Arbitrage in Takeovers," CEPR Discussion Papers 2026, C.E.P.R. Discussion Papers.
    5. Rudolf Kerschbamer, 1998. "Disciplinary Takeovers and Industry Effects," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(2), pages 265-306, June.
    6. 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.
    7. Francesca Cornelli & David D. Li, 2002. "Risk Arbitrage in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 837-868.
    8. Molin, Johan, 1996. "Optimal deterrence and inducement of takeovers: An analysis of poison pills and dilution," SSE/EFI Working Paper Series in Economics and Finance 102, Stockholm School of Economics.
    9. Neeman, Zvika & Orosel, Gerhard O., 2006. "On the efficiency of vote buying when voters have common interests," International Review of Law and Economics, Elsevier, vol. 26(4), pages 536-556, December.
    10. Maug, Ernst, 2006. "Efficiency and fairness in minority freezeouts: Takeovers, overbidding, and the freeze-in problem," International Review of Law and Economics, Elsevier, vol. 26(3), pages 355-379, September.
    11. Armo Gomes, 2001. "Takeovers, Freezeouts, and Risk Arbitrage," Penn CARESS Working Papers c4679b705ea88aebda985c6da, Penn Economics Department.
    12. Ann B. Gillette & Thomas H. Noe, 2000. "If at first you don't succeed: an experimental investigation of the impact of repetition options on corporate takeovers," FRB Atlanta Working Paper 2000-9, Federal Reserve Bank of Atlanta.
    13. Lucian Arye Bebchuk, 1994. "Efficient and Inefficient Sales of Corporate Control," NBER Working Papers 4788, National Bureau of Economic Research, Inc.
    14. Bebchuk, Lucian Arye & Hart, Oliver, 2001. "Takeover Bids versus Proxy Fights in Contests for Corporate Control," CEPR Discussion Papers 3073, C.E.P.R. Discussion Papers.
    15. Lucian Arye Bebchuk & Luigi Zingales, 1996. "Corporate Ownership Structures: Private versus Social Optimality," NBER Working Papers 5584, National Bureau of Economic Research, Inc.
    16. Liebler, Robert J., 1997. "Tender offers to influential shareholders," Journal of Banking & Finance, Elsevier, vol. 21(4), pages 529-540, April.
    17. Lucian Bebchuk & Oliver Hart, 2001. "Takeover bids vs. Proxy Fights in Contests for Corporate Control," NBER Working Papers 8633, National Bureau of Economic Research, Inc.

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