Friendly Takeover Offers for Public Corporations: Interim Uncertainty, Reserve Prices, and Bustup Fees

34 Pages Posted: 24 Mar 2012

Date Written: March 15, 2012


Legal restrictions create a material delay between the announcement of a friendly acquisition of a public firm and the deal’s final approval by target shareholders: a month for a takeover with a first step cash tender offer, longer for a merger. During this time target values may change, perhaps dramatically. While a target can accept new bids if its value rises, bidders usually cannot back out if the target’s value falls. We also observe that most takeovers occur at a significant premium to the target’s prior market price. Prior models of takeover bidding ignore the law-induced delay and resulting asymmetry between bidder and target, and generally assume that targets (if for sale) will accept zero-premium offers. We develop a model that incorporates delay-induced asymmetry and reserve prices. Principal new predictions include: targets often optimally set reserve prices higher than the current market price; first bidders may value the target for more than the target’s reserve price, yet be unwilling to bid because they expect a loss after accounting for the implied put option they provide the seller; the likelihood of a bidder making a bid is generally decreasing in the reserve price, the interim uncertainty, and the number of potential competing bidders; optimal reserve prices are decreasing in the interim uncertainty and number of potential new bidders, and can be below the target’s current price in extreme cases; (if the target offers a bustup fee to the first bidder, this increases the (conditional on the bustup fee) optimal reserve price, but reduces the target’s expected profit. Our predictions on the effect of bustup fees provide theoretical support for legal limits on bustup fees and other deal protections.

Keywords: mergers and acquisitions, reserve price, bustup fee, termination fee

JEL Classification: G34, G38

Suggested Citation

Black, Bernard S. and Dam, Robert A. and Dam, Robert A., Friendly Takeover Offers for Public Corporations: Interim Uncertainty, Reserve Prices, and Bustup Fees (March 15, 2012). Available at SSRN: or

Bernard S. Black

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Robert A. Dam (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-2289 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics