Targeting Target Shareholders

Abstract

We integrate heterogeneity and uncertainty in investor valuations into a model of takeovers. Investors have dispersed valuations, holding shares in …rms they value more highly, and a successful o¤er must win approval from the median target shareholder. We derive the consequences for an acquiring …rm's takeover o¤er-its size and cash/equity structure-and implications for takeover premia, …rm returns, share price dynamics, the probability that a takeover succeeds and shareholder welfare. We characterize when the acquirer prefers cash o¤ers, and when equity o¤ers are best. Our model collectively reconciles various empirical regularities that have proven elusive to explain in one uni…ed framework, and we derive new testable predictions.We thank Jie Gan, Jarrad Harford, Micah O¢ cer, and seminar participants at Arizona State University, Targeting target shareholders AbstractWe integrate heterogeneity and uncertainty in investor valuations into a model of takeovers. Investors have dispersed valuations, holding shares in …rms they value more highly, and a successful o¤er must win approval from the median target shareholder. We derive the consequences for an acquiring …rm's takeover o¤er-its size and cash/equity structure-and implications for takeover premia, …rm returns, share price dynamics, the probability that a takeover succeeds and shareholder welfare. We characterize when the acquirer prefers cash o¤ers, and when equity o¤ers are best. Our model collectively reconciles various empirical regularities that have proven elusive to explain in one uni…ed framework, and we derive new testable predictions.