TAKEOVERS 6 th set of transparencies for To

TAKEOVERS 6 th set of transparencies for To. CF

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

Golden parachutes Takeover defenses: – 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

I. PURE THEORY OF TAKEOVERS Future appearance of unknown raider who values firm more otherwise: option (Verizon/Genuity, DB) Raider appears Initial investment, borrows I-A Possibly: investments by entrepreneur raider Reasons for takeovers: good idea, better fit, . . . , synergy with other firm, private benefit from control. takeover No takeover value v to investors incumbent gets w Example

EXTRACTING RAIDER SURPLUS: TAKEOVER DEFENSES AS MONOPOLY PRICING In tradition of Diamond - Maskin 1979 Aghion - Bolton 1987 Point: future buyers not at the table initially {initial investors, entrepreneur} pair has monopoly power over sale. can pay Assumptions Raider not credit constrained known, but A large density entrepreneur not credit constrained

Suppose can commit to sale price P can commit to cutoff or

But “can’t commit” : see later. INCENTIVE TO PREPARE RAID Cost c of acquiring information: For cutoff may lead to reduction in INCUMBENT ENTREPRENEUR CREDIT CONSTRAINED where

If (1) satisfied for no change. Otherwise ( A small ) (a) shadow price of (1) (b) NPV-pledgeable income tradeoff once again

UNKNOWN VALUE ENHANCEMENT ( with measurable ex post) Observation: package sale not optimal, partial sale = metering device. Example: and independent. no credit constraint. Thought experiment: known:

unknown: keep 50% of shares, charge P for block, purchases iff

II. POSITIVE THEORY Looks at common institutions Suppose • single bidder • tender offer likelihood of takeover. restricted or not (# of shares) conditional or not (on majority stake). Suppose • equal voting rights • needs fraction to take control (to deliver Def: INVESTOR VALUE ENHANCING RAIDER: INVESTOR VALUE DECREASING RAIDER: and ).

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: ).

If private benefit from control Toehold: if and Dilution : can dilute fraction of gains made by shareholders who have not tendered – if gains control positive raider surplus

TAKEOVER DEFENSES 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 Assuming (otherwise no takeover)

PIVOTAL TENDERING (Bagnoli-Lipman 1988, Holmström-Nalebuff 1992, Gromb 1995) n shares, cash flow right 1/n. a n have voting right k a needed for control (a) CONDITIONAL OFFER (+ UNRESTRICTED) P= raider gets (entire surplus) (b) NO CONDITIONAL OFFER 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.

Expected value enhancement on voting shares:

For a large, can show (GH) Intuition Want one share-all votes! very unlikely

Multiple shares / shareholders: divide each share into N shares ( a. N voting shares, k. N needed for majority ) # of shares tendered 0 tenders for sure a randomizes on only one share N don’t tender 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.

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.

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). Would like raider to buy as many shares as possible: ONE-SHARE-ONE VOTE