Two Decades of Development of Tender Offer Market in Japan: An Analysis of Regulatory Changes, Offer Premiums and Share Price Reactions

Abstract

Over the past 20 years, there have been several important changes in Japanese takeover regulations. The changes have resulted in shifts in the balance of power between potential bidders and target shareholders. The implementation and revision of mandatory tender offer rules provided more protection for minority shareholders and new squeeze-out rules made any-or-all offers easier for bidders. Over this same period, the market for corporate control has undergone a remarkable period of growth. The annual number of transactions with a Japanese target has increased nearly 6 fold between 1989 and 2008.

The rule changes in conjunction with the shifts in the balance of power provide us with the opportunity to perform a natural experiment. We examine a sample of 353 tender offers between 1991 and 2007, approximately half of which are partial offers. Moreover, approximately 21 percent of them are at a discount, that is, they are for prices below the current market price.

Our results provide evidence that the relative bargaining power of bidders and target shareholders is important in the tender offer process and that the regulatory changes have been successful in increasing minority shareholder protections. We find that partial offers are relatively less common following the implementation of the squeeze-out rule in October 1999. The pre-offer price premiums are smaller for distressed targets and for those with a block seller. Focusing on the partial offers only, we find that the pre-offer premiums are lower when the bidder amasses a toe-hold prior to the offer, when the bidder wishes to acquire more shares, when there is a block seller, and when the target is distressed. Finally, the implementation of the squeeze-out rule resulted in higher pre-offer premiums and that the revised tender offer rules of December 2006 resulted in still higher premiums.

Keywords: Tender Offer Bid, Discounted TOB, Control Premium

JEL Classification: G34