Tender Offers and Leverage

36 Pages Posted: 27 Aug 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: July 2003

Abstract

We examine whether, and why, it matters how tender offers for widely held firms are financed. If tender offers are financed with debt, the positive effect of a synergy gain or value improvement on the combined firm's equity is partly offset by the simultaneous increase in debt. Dispersed target shareholders then only appropriate part of the value improvement, which mitigates the free-rider problem. Bankruptcy costs, incentive problems on the part of the raider, and defensive leveraged recapitalizations and asset sales by the target management are all counter-forces to high bidder leverage, thereby shifting takeover gains to target shareholders and causing takeovers to fail. While bankruptcy costs are a social cost, the takeover premium is merely a wealth transfer between the raider and target shareholders. As the raider does not internalize this, they use too much debt relative to the social optimum.

Keywords: Tender offers, leverage, free-rider problem

JEL Classification: G32, G34

Suggested Citation

Mueller, Holger M. and Panunzi, Fausto, Tender Offers and Leverage (July 2003). Available at SSRN: https://ssrn.com/abstract=438723

Holger M. Mueller (Contact Author)

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

44 West 4th Street
New York, NY 10012-1126
United States
212-998-0341 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~hmueller/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Fausto Panunzi

Bocconi University - Department of Economics ( email )

Via Roentgen 1
20136 Milan
Italy
+39 02 5836 5327 (Phone)
+39 02 5836 5343 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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

Paper statistics

Downloads
24
Abstract Views
3,647
PlumX Metrics