Discussion paper

DP3964 Tender Offers and Leverage

We examine whether, and why, it matters how tender offers for widely held firms are financed. If tender offers are financed with debt, the positive effect of a synergy gain or value improvement on the combined firm?s equity is partly offset by the simultaneous increase in debt. Dispersed target shareholders then only appropriate part of the value improvement, which mitigates the free-rider problem. Bankruptcy costs, incentive problems on the part of the raider, and defensive leveraged recapitalizations and asset sales by the target management are all counter-forces to high bidder leverage, thereby shifting takeover gains to target shareholders and causing takeovers to fail. While bankruptcy costs are a social cost, the takeover premium is merely a wealth transfer between the raider and target shareholders. As the raider does not internalize this, they use too much debt relative to the social optimum.


Panunzi, F and H Mueller (2003), ‘DP3964 Tender Offers and Leverage‘, CEPR Discussion Paper No. 3964. CEPR Press, Paris & London. https://cepr.org/publications/dp3964