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Competition and corporate tender offer contests

University of British Columbia

This thesis presents an empirical investigation of the role of competition in determining (1) bidder firm behaviour in, and (2) the resulting valuation effects of, corporate takeovers. The study is based on the most comprehensive sample currently available of interfirm tender offers for publicly traded U. S. target firms during the period 1971-1990. Corporate takeover contests differ in complex ways with respect to the asymmetric information and bargaining environment, distributions of bidder reservation values and target share ownership, and information acquisition costs. There is substantial theoretical work examining the strategic role of the choice of payment method, bidder elimination and target management resistance, and of particular interest in this thesis, pre-bid acquisition of target shares ("toehold") and its impact on the subsequent tender offer price. Despite a voluminous empirical literature on corporate acquisitions, systematic evidence on the extent and role of bidder toeholds on bidding strategies is sparse. While the toehold has been shown to be prevalent in takeover contests, the extant empirical literature contains few results pointing to the strategic role suggested by theory. The lack of statistical significance may reflect a combination of small samples, weak experimental design, and biases in estimation. This thesis remedies the small sample problem by examining more than 1350 takeover contests in the U. S. from 1971 to 1990. The experimental design is improved by including a larger set of sample controls, and addressing the bias issue by estimating a set of equations which simultaneously determines the toehold and the takeover premium. The wealth effects of takeover contests are estimated as a function of toeholds, the number of bids/bidders, the outcome of the bid, and the target management response. Other empirical issues, including the effect of toeholds on the probability of target management resistance and emergence of a second bid in the contest, are also examined. Finally, a new econometric technique is developed for simultaneously estimating event probabilities and conditional expected event returns in order to determine whether entering the takeover auction, and responding to rival bids for the target shares, on average enhances the wealth of the initial bidders' shareholders.

Thesis/Dissertation

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2009-06-04

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http://hdl.handle.net/2429/8754

Business Administration

University of British Columbia

UBCV

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