Rent Extraction with Securities Plus Cash

In our target‐initiated theory of takeovers, a target approaches potential acquirers that privately know their standalone values and merger synergies, where higher synergy acquirers tend to have larger standalone values. Despite their information disadvantage, targets can extract all surplus when synergies and standalone values are concavely related by offering payment choices that are combinations of cash and equity. Targets exploit the reluctance of high‐valuation acquirers to cede equity claims, inducing them to bid more cash. When synergies and standalone values are not concavely related, sellers can gain by combining cash with securities that are more information sensitive than equities.