The Information Content of Shareholder Tender Agreements

Abstract

In approximately 60% of tender offers a shareholder pre-commits to tender shares to a particular bidder by signing a Shareholder Tender Agreement (STA). This paper demonstrates the optimality of such a contract as a mechanism to overcome asymmetric information. An STA certifies the bidder’s synergy value to uniformed shareholders, thereby mitigating potential negative effects of asymmetric information and increasing the efficiency of the takeover process. A low valuation bidder who cannot afford a bid that entices tendering without an STA incurs the cost of an STA to certify his low valuation. The STA enables a value increasing takeover, thus benefiting all bidder and target firm shareholders. Consistent with existing empirical evidence, the model predicts lower bids, greater uncertainty, and greater ownership concentration in STA offers.

Keywords: Tender Offer, Takeover, Asymmetric Information

JEL Classification: G34, D82