Tender Offers and Leverage

35 Pages Posted: 4 Nov 2008  

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Fausto Panunzi

Bocconi University - Department of Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 6 versions of this paper

Date Written: July 2003

Abstract

We examine the role of leverage in tender offers for widely held firms. Leverage allowsraiders to appropriate part of the value gains arising from takeovers, hence reducing the takeover premium and mitigating the free-rider problem. Leveraged takeovers may thus be profitable even if target shareholders are dispersed. Bankruptcy costs, incentive problems on the part of the raider, and defensive leveraged recapitalizations and asset sales by the target management all limit the raider s ability to borrow, thus shifting takeover gains to targetshareholders and reducing the takeover likelihood. While bankruptcy costs are a social cost,the takeover premium is merely a wealth transfer to target shareholders. As the raider does not maximize social welfare, he uses too much debt compared to the social optimum.

Suggested Citation

Mueller, Holger M. and Panunzi, Fausto, Tender Offers and Leverage (July 2003). NYU Working Paper No. S-CG-03-02. Available at SSRN: https://ssrn.com/abstract=1295252

Holger M. Mueller (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
New York, NY 10012-1126
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212-998-0341 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~hmueller/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Fausto Panunzi

Bocconi University - Department of Economics ( email )

Via Roentgen 1
20136 Milan
Italy
+39 02 5836 5327 (Phone)
+39 02 5836 5343 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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