Abstract

http://ssrn.com/abstract=1023039
 


 



Taking Finance Seriously: How Debt-Financing Distorts Bidding Outcomes in Corporate Takeovers


Robert P. Bartlett III


University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy


UGA Legal Studies Research Paper No. 07-012
Fordham Law Review, Vol. 76, Spring 2008

Abstract:     
Economic analysis of corporate takeovers has traditionally advocated legal doctrines that ensure a target company in a takeover contest is acquired by the bidder willing to pay the most for it. The reason stems from the conventional assumption that a bidder's offer price should reflect its ability to put target's assets to productive use.

This Article challenges this assumption by turning to the success of private equity firms in outbidding publicly-traded, strategic bidders during the recent takeover wave. Using standard valuation modeling, the Article reveals how a critical component of any bidder's valuation of target stems from its source of acquisition financing. Specifically, a bidder's ability to finance a takeover with debt can lead to a significant increase in its valuation of target owing to a de facto government subsidy created by the deductibility of interest payments. Simultaneously, however, not every bidder has the ability to utilize debt-financing to the same extent - a point emphasized in forty years of finance research. The result is that during periods of robust credit markets such as occurred during 2004-2007, the highest bidders in takeover contests may often be those bidders such as private equity firms who are capable of using large amounts of debt-financing.

By highlighting the critical role of finance in explaining bidder valuations, this Article illustrates how accurate economic analysis of takeovers requires careful attention to bidders' divergent financing decisions. Indeed, by failing to take finance seriously, traditional takeover scholarship may very well be advocating legal rules that promote inefficient takeovers.

Number of Pages in PDF File: 49

Keywords: corporate takeovers, private equity, acquisition financing

JEL Classification: G32, K22

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Date posted: October 21, 2007 ; Last revised: August 18, 2009

Suggested Citation

Bartlett, Robert P., Taking Finance Seriously: How Debt-Financing Distorts Bidding Outcomes in Corporate Takeovers. UGA Legal Studies Research Paper No. 07-012; Fordham Law Review, Vol. 76, Spring 2008. Available at SSRN: http://ssrn.com/abstract=1023039

Contact Information

Robert P. Bartlett III (Contact Author)
University of California, Berkeley - School of Law ( email )
215 Boalt Hall
Berkeley, CA 94720-7200
United States
510-642-6646 (Phone)
University of California, Berkeley - Berkeley Center for Law, Business and the Economy
UC Berkeley School of Law
Berkeley, CA 94720
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