Why Tender Offers Should be Financed with Debt

Holger M. Müller ()
Additional contact information
Holger M. Müller: Department of Economics, University of Mannheim, Postal: A5, Room A237, 68131 Mannheim, Germany

No 98-59, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: This paper considers the choice of tender offer financing in the presence of atomistic shareholders. If the tender offer is financed with debt, the raider can extract at least part of the gains from future value improvements as the additional leverage introduced into the merged firm reduces the posttakeover share value and therefore the incentives for target shareholders to hold on to their shares. In contrast, if the tender offer is financed with equity, any gains from future value improvements must be passed to the target shareholders. The paper further considers the optimal choice of capital structure by the target management in response to a concrete takeover threat. It is shown that an increase in leverage raises the bid premium but reduces the probability that the takeover succeeds as it limits the raider's ability to borrow against the target's existing assets.

Pages: 27 pages
Date: 1998-12-01
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-pol
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sfb504.uni-mannheim.de/publications/dp98-59.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.sfb504.uni-mannheim.de:80 (nodename nor servname provided, or not known)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:xrs:sfbmaa:98-59

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim Contact information at EDIRC., Sonderforschungsbereich 504, University of Mannheim
Bibliographic data for series maintained by Carsten Schmidt ( this e-mail address is bad, please contact ).