Tender Offers and Leverage

39 Pages Posted: 14 Jul 2003

See all articles by Holger M. Mueller

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: September 2003

Abstract

We examine the role of leverage in tender offers for widely held firms. Leverage allows raiders 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 target shareholders 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.

Keywords: tender offers, leverage, holdout problem

JEL Classification: G32, G34, K22

Suggested Citation

Mueller, Holger M. and Panunzi, Fausto, Tender Offers and Leverage (September 2003). ECGI - Finance Working Paper No. 22/2003; AFA 2004 San Diego Meetings, Available at SSRN: https://ssrn.com/abstract=415480 or http://dx.doi.org/10.2139/ssrn.415480

Holger M. Mueller (Contact Author)

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

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Fausto Panunzi

Bocconi University - Department of Economics ( email )

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European Corporate Governance Institute (ECGI)

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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