Determinants of Tender Offer Premiums
9 Pages Posted: 29 Jul 2011
Date Written: 1985
The bid premium acquiring companies offer for target company shares may be expected to be a positive function of potential acquisition-related benefits and a negatie function of the bargaining power of the bidder. A bid premium model using debt, working capital, type of combination, valuation-related variables and bargaining-strength variables has relatively high explanatory power for a wide moss-section of firms and a predictive power superior to that of naive bidding strategies.
Firms with declining amounts of leverage and firms with relatively low valuation ratios command significantly higher bid premiums. The percentage of shares already controlled by the offering company, its ability to acquire enough shares to be able to implement potentially beneficial changes, and the existence of an opposing bid at the time an offer is made are also significant determinants of bid premiums.
When two or more bidders compete for the same target, the bid premium averages 30 percentage points higher than the sample mean. Premiums in offers where the bidder seeks majority control are 9 percentage points higher than when the bidder does not seek majority control, and premiums on nonconglomerate offers tend to be 7 percentage points higher than premiums on conglomerate offers.
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