1. TAKEOVERS 6th set of transparencies for ToCF

2. 2 Gains: target shareholders  30% acquiring co  0 % (hubris? free riding?...) other constituencies? (workers, consumers,...) Market for corporate control US merger mania in 80’s. Europe: 2000 hostile takeover of Mannesmann. 2001: Germany opposes EU proposed directive to stop managements from using poison pills. Response to failure of internal control (“if current management fails to maximize investor value, takeover will replace management”)?

3. 3 –greenmail (targeted repurchases raider stock price falls) – poison pills –restrictions on inalienability of stocks (need approval of board) – staggered boards –supermajority amendments – fair-price amendments – dual class votes – threat of litigation Golden parachutes Takeover defenses:

4. 4 PURE THEORY OF TAKEOVERS I. Future appearance of unknown raider who values firm more otherwise: option (Verizon/Genuity, DB) Reasons for takeovers: Raider appears takeover No takeover value v to investors incumbent gets w Example Possibly: investments by entrepreneur raider Initial investment, borrows I-A good idea, better fit,..., synergy with other firm, private benefit from control.

5. 5 EXTRACTING RAIDER SURPLUS: TAKEOVER DEFENSES AS MONOPOLY PRICING In tradition of Diamond - Maskin 1979 Aghion - Bolton 1987 Raider not credit constrained known, but density Point: future buyers not at the table initially {initial investors, entrepreneur} pair has monopoly power over sale. Assumptions can pay A large entrepreneur not credit constrained

6. 6 Suppose can commit to sale price P can commit to cutoff or

7. 7 But “can’t commit” : see later. INCENTIVE TO PREPARE RAID Cost c of acquiring information: For cutoff INCUMBENT ENTREPRENEUR CREDIT CONSTRAINED where may lead to reduction in

8. 8 If (1) satisfied for no change. Otherwise ( A small ) (a) (b) NPV-pledgeable income tradeoff once again shadow price of (1)

9. 9 Observation:package sale not optimal, partial sale = metering device. UNKNOWN VALUE ENHANCEMENT ( with measurable ex post) Example: no credit constraint. and independent. Thought experiment: known:

10. 10 keep 50% of shares, charge P for block, unknown: purchases iff

11. 11 POSITIVE THEORY II. Looks at common institutions likelihood of takeover. Suppose single bidder tender offer restricted or not (# of shares) conditional or not (on majority stake). Suppose equal voting rights needs fraction to take control (to deliver and ). Def:INVESTOR VALUE ENHANCING RAIDER: INVESTOR VALUE DECREASING RAIDER:

12. 12 VALUE ENHANCING RAIDER: (Grossman-Hart 1980) Continuum of shareholders. Unrestricted, unconditional offer probability of success suppose then better off holding on to share: (in the absence of private benefit from control: ).

13. 13 raider surplus Dilution :can dilute fraction of gains made by shareholders who have not tendered – if gains control positive If private benefit from control Toehold: if and

14. 14 TAKEOVER DEFENSES Assuming (otherwise no takeover) Example: flip-over plan (holders of shares are allowed to purchase new nonvoting shares at substantial discount after a hostile takeover) shares kept (50%) worth shares acquired (50%) worth

15. 15 PIVOTAL TENDERING (Bagnoli-Lipman 1988, Holmström-Nalebuff 1992, Gromb 1995) (a) CONDITIONAL OFFER (+ UNRESTRICTED) (b) NO CONDITIONAL OFFER n shares, cash flow right 1/n. P =  raider gets (entire surplus) 1 share / shareholder Wlog: raider does not bid for B-shares (“no trade”). A-shares: mixed strategy equilibrium(others, e.g., “k tender; others don’t”) Shareholder i = m -i shares tendered by others. Also A-shareholders get each. a  n have voting right k  a needed for control

16. 16 Expected value enhancement on voting shares:

17. 17 For a large, can show (GH) Intuition Want one share-all votes! very unlikely

18. 18 divide each share into N shares(aN voting shares, kN needed for majority ) # of shares tendered a tenders for suredon’t tender randomizes on only one share 0N Multiple shares / shareholders: a shareholders support of distribution at most a. If  bounded away from 1, then can make sure takeover succeeds by tendering a more shares extra profit on inframarginal shares.

19. 19 Discussion Noise is here endogenous (mixed strategy). Introduction of exogenous noise (e.g., Segal 1999: pr (a shareholder cannot respond to offer) =  ) resurrects Grossman and Hart's free-riding result. Each shareholder is too unlikely to be pivotal. Segal's other argument: even if shareholder turns out to be pivotal, discontinuity posited by model overpredicts impact: intensity of monitoring, shareholders' payoff under managerial authority, etc. move more continuously. Furthermore, share acquisition may occur over time.

20. 20 VALUE DECREASING RAIDER DS to tender coordination problem Coordination or unanimity rule will do. But does not capture SupposeA shares B shares (no interest to raiders). ONE-SHARE-ONE VOTE Would like raider to buy as many shares as possible: