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Working paper

Takeovers under Asymmetric Information: Block Trades and Tender Offers in Equilibrium

I study transfers of control in a firm having atomistic shareholders and one dominant minority blockholder (incumbent). A potential acquirer can try to acquire control by purchasing the incumbent's share. If the negotiations are successful, the control changes hands via a block trade. If the negotiations fail, the acquirer can launch a public tender offer. According to empirical evidence, both types of transactions occur in such companies. However, the existing models that allow for both types of control transfer never obtain tender offers in equilibrium. My model fills this gap in the literature. The key feature of my setup is asymmetry of information about the acquirer's ability to generate value, which makes bargaining between the acquirer and the incumbent imperfect. As a result, both block trades and tender offers can arise in equilibrium. Specifically, high ability acquirers take over the firm by means of a tender offer, intermediate types negotiate a block trade, and low types do not attempt any transaction. This result provides an immediate explanation for higher target announcement returns in tender offers as compared to block trades. The model also explains why takeover premiums and targets' stock price reaction to tender offers may be higher in countries with stronger shareholder protection and predicts that better shareholder protection should result in higher announcements returns for targets in block trade transactions as well. Finally, I obtain that transfers of corporate control in firms with a dominant minority blockholder are more efficient when shareholder protection is better and provides an argument against the mandatory bid rule in strong legal regimes.