Takeovers, Freezouts, and Risk Arbitrage
- Topics:
- Mergers
- Source:
- Knowledge@Wharton
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Overview: This paper develops a dynamic model of tender offers in which there is trading on the target's shares during the takeover. It also tells about the condition where bidders can freeze out target shareholders (compulsorily acquire remaining shares not tendered at the bid price), and features that prevail on almost all takeovers. It is shown that trading allows for the entry of arbitrageurs with large blocks of shares who can hold out a freeze-a threat that forces the bidder to offer a high preemptive bid. Moreover, freezeouts eliminate the free-rider problem, but front-end loaded bids, such as two-tiered and partial offers, do not benefit bidders because arbitrageurs can undo any potential benefit and eliminate the coerciveness of these offers. Similarly, the takeover premium is also largely unrelated to the bidder's ability to dilute the target's shareholders after the acquisition, also due to potential arbitrage activity.
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Format: HTML | Size: 354KB | Date: Mar 2001 | Pages: 50
