A general model for tender offers and an application to the choice of the means of payment

Patricia Marie Charlety-Lepers, University of Pennsylvania


This dissertation provides a theoretical analysis of tender offers under situations of asymmetric information between the bidding firm's manager and the target's shareholders. Within a submodel for cash offers we analyze the role of synergies that fall directly on the bidding firm (the bidder's private synergies) and show that they must be sufficiently high on average to solve the free-rider problem. As a consequence, no tender offer will be possible if they are too low and merger negociations are predictable. In a second submodel we analyze the role of the means of payment (cash or securities, or a combination of both) when the true pretakeover value (versus the market value) of the bidding firm, or the sum of this pretakeover value and its private synergies are unknown to target shareholders. We find that when there is not tax disadvantage for cash offers from the point of view of target shareholders cash will be the only means of payment used in equilibrium by all but the bidder of the worst quality. If there is however a tax disadvantage for cash offers, there exist separating equilibria: if bidding firms have the choice between all-cash and all-securities offers, the group of worst bidders uses securities while other bidders finance the acquisition with cash exclusively; if bidding firms can use a combination of cash and securities, a separating equilibrium can be found where the proportion of cash used in the offer indicates the relative quality of the bidder. These results have clear consequences in an informationally efficient (in the semi-strong form) market: upon announcement of a relatively high securities offer, the market will revise the value of the bidder downward which may lead to the apparent negative wealth effects for the acquirer's shareholders observed in the empirical literature.

Subject Area

Finance|Economic theory

Recommended Citation

Charlety-Lepers, Patricia Marie, "A general model for tender offers and an application to the choice of the means of payment" (1990). Dissertations available from ProQuest. AAI9112545.