Information and Efficiency in Tender Offers

We analyze tender offers where privately informed shareholders are uncertain about the raider's ability to improve firm value. The raider suffers a "lemons problem" in that, for any price offered, only shareholders who are relatively pessimistic about the value of the firm tender their shares. Consequently, the raider finds it too costly to induce shareholders to tender when their information is positive. In the limit as the number of shareholders gets arbitrarily large, when private benefits are relatively low, the tender offer is unsuccessful if the takeover has the potential to create value. The takeover market is therefore inefficient. In contrast, when private benefits of control are high, the tender offer allocates the firm to any value-increasing raider, but may also allow inefficient takeovers to occur. Unlike the case where all information is symmetric, shareholders cannot always extract the entire surplus from the acquisition. Copyright 2008 The Econometric Society.