Tender Offers and Leverage

43 Pages Posted: 24 Jul 2004

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)

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Abstract

This paper examines the role of leverage in tender offers for widely held firms. We show that a leveraged bootstrap acquisition implements an outcome that - from an economic perspective - is quite similar to the outcome implemented by the Grossman-Hart dilution mechanism. To raise the funds for the takeover, the raider initially sets up a new acquisition subsidiary that issues debt backed by the target's assets and future cash flows. In the first step of the acquisition, the raider acquires a majority of the target's stock through a tender offer. In a second step, the target is merged with the raider's indebted acquisition subsidiary. The fact that the acquisition subsidiary is indebted lowers the combined firm's share value and thus the incentives for target shareholders to hold out in the tender offer. This allows the raider to lower the bid price, make a profit, and overcome the free-rider problem.

Suggested Citation

Mueller, Holger M. and Panunzi, Fausto, Tender Offers and Leverage. Quarterly Journal of Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=567341

Holger M. Mueller (Contact Author)

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

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI) ( email )

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Fausto Panunzi

Bocconi University - Department of Economics ( email )

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Italy
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+39 02 5836 5343 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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