TAKEOVERS

6th set of transparencies for ToCF

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Gains: target shareholders 30% acquiring co 0 % (hubris? free riding?...) other constituencies?

(workers, consumers,...)

Market for corporate control

US merger mania in 80’s.

Europe: 2000 hostile takeover of Mannesmann.

2001: Germany opposes EU proposed directive to stop managements from

using poison pills.

Response to failure of internal control (“if current management fails to maximize

investor value, takeover will replace management”)?

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– greenmail (targeted repurchases

raider stock price falls)– poison pills– restrictions on inalienability of stocks

(need approval of board)

– staggered boards– supermajority amendments– fair-price amendments– dual class votes– threat of litigation

Golden parachutes Takeover defenses:

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PURE THEORY OF TAKEOVERSI.

Future appearance of unknown raider who values firm more

otherwise: option(Verizon/Genuity, DB)

Reasons for takeovers:

Raider appears

takeover

No takeover value v to investors incumbent gets w

Example

Possibly: investments by entrepreneur raider

Initial investment,borrowsI-A

good idea, better fit,...,

synergy with other firm,

private benefit from control.

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EXTRACTING RAIDER SURPLUS:

TAKEOVER DEFENSES AS MONOPOLY PRICING

In tradition of Diamond - Maskin 1979

Aghion - Bolton 1987

Raider not credit constrained

known, but density

Point: future buyers not at the table initially

{initial investors, entrepreneur} pair has monopoly power over

sale.

Assumptions can pay

A large entrepreneur not credit constrained

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Suppose can commit to sale price P

can commit to cutoff

or

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But “can’t commit” : see later.

INCENTIVE TO PREPARE RAID

Cost c of acquiring information: For cutoff

INCUMBENT ENTREPRENEUR CREDIT CONSTRAINED

where

may lead to reduction in

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If (1) satisfied for no change.

Otherwise ( A small )

(a)

(b)

NPV-pledgeable income tradeoff once again

shadow price of (1)

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Observation: package sale not optimal, partial sale = metering device.

UNKNOWN VALUE ENHANCEMENT

( with measurable ex post)

Example:

no credit constraint.

and independent.

Thought experiment: known:

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keep 50% of shares,

charge P for block,

unknown:

purchases iff

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POSITIVE THEORYII.

Looks at common institutions likelihood of takeover.

Suppose • single bidder

• tender offer restricted or not (# of shares)

conditional or not (on majority stake).

Suppose • equal voting rights

• needs fraction to take control (to deliver and ).

Def: INVESTOR VALUE ENHANCING RAIDER:

INVESTOR VALUE DECREASING RAIDER:

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VALUE ENHANCING RAIDER: (Grossman-Hart 1980)

Continuum of shareholders.

Unrestricted, unconditional offer

probability of success

suppose then better off holding on to share:

(in the absence of private benefit from control: ).

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raidersurplus

Dilution : can dilute fraction of gains made by shareholders who have not tendered – if gains control

positive

If private benefit from control

Toehold:

if

and

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TAKEOVER DEFENSES

Assuming (otherwise no takeover)

Example: flip-over plan (holders of shares are allowed to purchase new nonvoting shares at substantial discount after a hostile takeover)

shares kept (50%) worth

shares acquired (50%) worth

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PIVOTAL TENDERING(Bagnoli-Lipman 1988, Holmström-Nalebuff 1992, Gromb 1995)

(a) CONDITIONAL OFFER (+ UNRESTRICTED)

(b) NO CONDITIONAL OFFER

n shares, cash flow right 1/n.

P = raider gets (entire surplus)

1 share / shareholder

Wlog: raider does not bid for B-shares (“no trade”).

A-shares: mixed strategy equilibrium (others, e.g., “k tender; others don’t”)

Shareholder i = m-i shares tendered by others.

Also A-shareholders get each.

a n have voting right k a needed for control

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Expected value enhancement on voting shares:

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For a large, can show (GH)

Intuition

Want one share-all votes!

very unlikely

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divide each share into N shares ( aN voting shares, kN needed for

majority )

# of shares tendereda

tenders for sure don’t tenderrandomizes on only one share

0 N

Multiple shares / shareholders:

a shareholders support of distribution at most a. If bounded away from 1, then can make sure takeover succeeds by tendering a more shares

extra profit on inframarginal shares.

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Discussion

Noise is here endogenous (mixed strategy). Introduction of exogenous noise (e.g., Segal 1999: pr (a shareholder cannot respond to offer) = ) resurrects Grossman and Hart's free-riding result. Each shareholder is too unlikely to be pivotal.

Segal's other argument: even if shareholder turns out to be pivotal, discontinuity posited by model overpredicts impact: intensity of monitoring, shareholders' payoff under managerial authority, etc. move more continuously. Furthermore, share acquisition may occur over time.

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VALUE DECREASING RAIDER

DS to tender

coordination problem

Coordination or unanimity rule will do.But does not capture

Suppose A shares

B shares (no interest to raiders).

ONE-SHARE-ONE VOTE

Would like raider to buy as many shares as possible: