Tender offers and gains division : an analysis of the bidder’s bargaining power

This paper investigates the impact of the bargaining power of the acquiring company on the division of gains between the two firms, and particularly its capacity to retain a high part of the created value. Our experimental hypotheses are based on theoretical models which explain the tender offer process as a game between the bidder and the target. The different models analyse two aspects of the problem : (1) the relation between the bidder and the target shareholders, which define a minimum acceptable price, particularly taking into account the free-rider problem, and (2) the relation between the bidder and potential competitors, which explain how the initial bidder can avoid competition and thus define a pre-emptive optimal strategy. For our sample, the total gain is FF687 million per operation : FF241 million for the acquirer and FF446 million for the target. It is found that the bargaining power of the bidder is stronger when the acquisition is highly synergistic : in this case the acquirer can retain a higher part of the total gains. Its power on the target’s shareholders can also be increased by different incitative mechanisms. For our sample, two of them have a significant postive impact on the bidder’s abnormal returns : the fraction of the target shares controlled prior to the acquisition (as in Schleifer and Vishny’s model), and the threat of minority shareholders’dilution (as in Grossman and Hart’s model). In opposition to several models and previous studies, the method of payment has a non significant impact on the bidder’s abnormal returns.