Interfirm Tender Offers and the Market for Corporate Control

Abstract

It is commonly believed that the interfirm cash tender offer is an attempt by the bidding firm to purchase the target shares and profit from their subsequent market appreciation. This belief is inconsistent with the available evidence. While acquiring firms earn a positive return from the tender offer, they do not realize a capital gain from the target shares that they purchase. In the 161 successful offers in this study, bidding firms paid target stockholdei-s an average premium of 49% for the shares they purchased. This premium is calculated relative to the closing price of a target share 2 months prior to the announceinent of the offer. The average appreciation of the target shares through I month subsequent to the execution of the offer was 36%, relative to this same benchmark. In sum, target This paper examines the nature of interfirm cash tender offers. The tender offer is viewed as a bid for the right to conitrol the resources of the target firm. A model based on this interpretation, efficient and competitive mar-kets, and rational expectations is developed and tested. The implications of this model are shown to be consistent with the following documented empirical facts concerning the average tender offer: the stockholders of both acquiring and acquired firms realize a significant capital gain; acquiring firms suffer a significant capital loss on the target shares they pul-chase; target stockholders realize a significant capital gain regardless of the outcome of the offer or whetheror not they tender their shar-es.

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