Financing Bidders in Takeover Contests

Vladimirov, Vladimir

doi:10.2139/ssrn.2023576

Cited by 3 publications

(3 citation statements)

References 55 publications

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“…For example, externally financed cash bids are higher than internally financed cash bids. See Vladimirov (2015), which also summarizes expected utility from a search is reported as the average of a thousand simulations for each one of the possible draws.…”

Section: The Parameters and The Modelmentioning

confidence: 99%

Defensive Tactics and Optimal Search: A Simulation Approach

Gilson

Schwartz

2016

SSRN Journal

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The appropriate division of authority between a company's board and its shareholders has been the central issue in the corporate governance debate for decades. This issue presents most vividly for defensive tactics: the extent to which the board of a potential acquisition target is allowed to prevent the shareholders from responding directly to a hostile bid. In the US today, the board's power is extensive; control largely lies with the board. Normative evaluations of current law face two obstacles. First, defensive tactics raise the social welfare question whether, or to what extent, these tactics deter ex ante efficient takeovers. This question cannot be answered empirically because the econometrician can observe bids but cannot observe deterred bids. The social welfare issue is also difficult to resolve using current analytical techniques because the market for corporate control is unusually complex: in it, financial and strategic buyers search for mismanaged companies or synergy targets; and some synergy targets search for acquirers. Turning to targets, the question which defensive tactics level maximizes shareholder welfare also is difficult to answer because of the qualitative nature of defensive tactics: Is a poison pill more or less privately efficient than a staggered board? What are the welfare consequences of combining a pill with a staggered board or a supermajority voting requirement? In this paper, we write a search equilibrium model of the market for corporate control and solve it by simulating plausible parameters for the variables of interest. Because we specify the number of ex ante efficient acquisitions that could be made, we can estimate market efficiency-the ratio of made matches to good matches-under legal regimes that are more or less friendly to defensive tactics. Also, we argue that the common metric among defensive tactics is time: the ability of various tactics to delay bid completion and thus reduce bidder, and thereby increase target, returns. We have two important results: First, strong defensive tactics reduce market efficiency significantly. Our simulations suggest that approximately a $100 billion in deal value is lost each year in consequence of these tactics. Simulations are only suggestive and our simulated model likely overstates the welfare loss. Nevertheless, the result that defensive tactics cause economically significant welfare losses would stand even if our magnitude estimate is halved. Second, the defensive tactics level that maximizes target shareholder welfare is materially higher than the level that maximizes social welfare. These results also support a methodological claim: equilibrium analysis can illuminate regulatory issues regarding the market for corporate control.

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Section: The Parameters and The Modelmentioning

confidence: 99%

Defensive Tactics and Optimal Search: A Simulation Approach

Gilson

Schwartz

2016

SSRN Journal

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“…Security-bid auctions are studied byHansen (1985),Rhodes-Kropf and Viswanathan (2000), DeMarzo, Kremer, andSkrzypacz (2005),Gorbenko and Malenko (2011),Liu (2016),Sogo, Bernhardt, and Liu (2016), and Cong (2017) Vladimirov (2015). examines the link between making bids in securities and the …nancing of cash bids via issuing securities to investors.…”

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The Timing and Method of Payment in Mergers when Acquirers Are Financially Constrained

Gorbenko¹,

Malenko²

2017

The Review of Financial Studies

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Although acquisitions are a popular form of investment, the link between …rms' …nancial constraints and acquisition policies is not well understood. We develop a model in which …nancially constrained bidders approach targets, decide how much to bid and whether to bid in cash or in stock. In equilibrium, …nancial constraints do not a¤ect the identity of the winning bidder, but they lower bidders' incentives to approach the target. Auctions are initiated by bidders with low constraints or high synergies. The use of cash is positively related to synergies and the acquirer's gains from the deal and negatively to …nancial constraints. (D44, G32, G34) We are grateful to two anonymous referees;

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“…2 Section 2.2 provides other explanations for differences between stock and cash payment. 3 I acknowledge that there are several other studies which use the source of financing either with another research focus (for example,Datta and Iskandar-Datta 1995;Dittmar et al 2012;Vladimirov 2015) or with an indirect approach (for example, Schlingemann 2004;Harford et al 2009;Elsas et al 2014).…”

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confidence: 99%

Challenging the payment effect in bank-financed takeovers

Fischer

2015

J Manag Control

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In the context of bank-financed takeovers, I examine the influence of loans and their characteristics on the success of acquisitions. The unique setting of matched syndicated loans allows me to forego the regular assumption in academic literature of cash payment being equal to debt financing. Consequently, I am able to distinguish between the payment effect and the financing effect of an acquisition. My three main findings are: (i) Payment method is just an estimator of the debt proportion in takeovers. Although percentage of cash has significant explanatory power to account for the sources of financing, variation still remains. (ii) Controlling for the real financial structure renders the payment method insignificant. Hence, the well-known outperformance of cash payment around the announcement of a takeover might actually just be an outperformance of debt-financed takeovers. (iii) Bank-financed acquisitions are associated, on average, with positive abnormal returns for acquirers' stockholders. Higher bank involvements-approximated by greater deal leverage, higher loan costs, longer maturity, lower interest coverage, or no previous banking relationship-are signals for a more successful takeover.

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Financing Bidders in Takeover Contests

Cited by 3 publications

References 55 publications

Defensive Tactics and Optimal Search: A Simulation Approach

Defensive Tactics and Optimal Search: A Simulation Approach

The Timing and Method of Payment in Mergers when Acquirers Are Financially Constrained

Challenging the payment effect in bank-financed takeovers

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