Top-Up Options and Tender Offers
59 Pages Posted: 22 Jul 2014
Date Written: July 22, 2014
We investigate the role of top-up options granted by target managers to bidders in tender offers. A top-up option enables bidders to bypass target shareholder consent and allows for relatively fast execution of the tender offer. Our evidence, from 456 tender offers announced during 2000-2012 suggests that deals with top-up options are detrimental to both bidder and target shareholders, when compared to tender offers without the top-up feature. This effect seems to be concentrated in the pre-2007 period. After 2006 a large majority of tender offers include top-up options. We also find that the use of top-up options is negatively related to the use of lock-up options in the early period. In the later period of our sample, when lock-up options are no longer used in tender offers, toeholds are negatively related to the use of top-up options. Moreover, top-up options increase the speed of deal completion and are associated with less hostility, higher target free cash flows, and higher termination fees. We also provide some evidence that targets that provide top-up options have weaker governance and we find that target management that provides a top-up option is more likely to receive a golden parachute. Overall we conclude that the use of top-up options is most consistent with an anti-competitive hypothesis.
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