Takeovers, Freezeouts, and Risk Arbitrage

48 Pages Posted: 18 Jul 2001  

Armando R. Gomes

Washington University in Saint Louis - John M. Olin Business School

Date Written: March 2001

Abstract

This paper develops a dynamic model of tender offers in which there is trading on the target's shares during the takeover, and bidders can freeze out target shareholders (compulsorily acquire remaining shares not tendered at the bid price), features that prevail on almost all takeovers. We show that trading allows for the entry of arbitrageurs with large blocks of shares who can hold out a freezeout - a threat that forces the bidder to offer a high preemptive bid. There is also a positive relationship between the takeover premium and arbitrageurs' accumulation of shares before the takeover announcement, and the less liquid the target stock, the strong this relationship is. Moreover, freezeouts eliminate the free-rider problem, but front-end loaded bids, such as two-tiered and partial offers, do not benefit bidders because arbitrageurs can undo any potential benefit and eliminate the coerciveness of these offers. Similarly, the takeover premium is also largely unrelated to the bidder's ability to dilute the target's shareholders after the acquisition, also due to potential arbitrage activity.

Keywords: Takeovers, freezeouts, arbitrage, hold-out power

JEL Classification: C78, D82, G43

Suggested Citation

Gomes, Armando R., Takeovers, Freezeouts, and Risk Arbitrage (March 2001). PIER Working Paper No. 01-027; U of Penn, Inst for Law & Econ Research Paper 01-10. Available at SSRN: https://ssrn.com/abstract=277109 or http://dx.doi.org/10.2139/ssrn.277109

Armando R. Gomes (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
3145607087 (Phone)

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