M&A and Governance Flashcards
What is a tender offer?
An offer to acquire shares directly from individual shareholders of target firm
What do Moeller, Schlingemann and Stulz (2007) find about announcement gains?
That they tend to be small but positive. Avg. abnormal return is 0.8%.
What is the general formula for expected gain from a takeover
[a * (z) + beta (z - x) ] * P - c a is toehold share z is value added beta is share acquired x is premium paid over current price P is probability of success c is the cost of information
What is the general takeaway from the atomistic Grossman and Hart model?
That raiders never gain on takeovers except for on the appreciation on their toehold stake. Current owner will only sell their stake if the raider would acquire the shares for the value they will be worth after the takeover
What is the free-rider problem in the Grossman and Hart model?
That without a toehold stake in the firm, a takeover will never occur even if it can generate value
How do you find the mixing probability between tendering and not tendering in the non-atomistic raider model?
In order to mix, shareholder must be indifferent between mixing and not mixing.
If tendering you will get the premium with certainty. If not tendering, you will get the value appreciation if the take over succeeds
With this equality you can find the mixing probability
How do you solve the non-atomistic raider model?
There are several equilibria, where 1 tenders and no one else does. To find the mixed-strategy equillibrium, start by finding the mixing probability (indifference argument). Then optimize the bid the raider makes
What is the raiders expected total payoff in a model with 3 shareholders?
Total value of the firm minus payoff to the shareholders
Total value of the firm is 3 times probability of takeover succes.
Shareholder payoff is tender offer to each shareholders. We know that shareholders get the same value whether they tender or not (since they are mixing, hence indifferent), so the value to each shareholder will also be b, the tender offer, whether they tender or not
In a nonatomistic model, what is the effect of a toehold on shareholders?
It increases the incentive to freeride, since if they do not tender, the probability of success is higher with a toehold
What is the effects of toeholds on the optimal bid in the nonatomistic takeover model?
With higher incentive to free-ride, the bid needs to be higher to incentivize shareholders to tender
How can winners curse be applied to corporate acquisitions?
Rational economic model. bidders factor in the winner’s curse when formulating their bis
Behavioral models: bidders ignore the winner’s curse and overbid
What is the idea of hubris in corporate acquisitions?
That takeovers occur only when raiders make valuation mistakes. Takeovers are thus pure wealth transfers from raiders to targets, without any total value increase
What is an empirical problem for the stock overvaluation theory?
That the stock run-up before 2000 did not lead to any increase in proportion of all-stock mergers
What is the general effect of toeholds on the size of bids?
Toeholds should make bids larger. A part of the value goes to yourself and it may make shareholders demand a higher bid
What does empirics say about toeholds?
Toeholds have become less prevalent. Troublesome if toeholds are very important