Mergers and Acquisitions: Strategic and Informational Issues

A merger is a transaction that combines two firms, leaving one surviving entity. An acquisition is the purchase of one firm by another individual or firm. Both transactions fall under the more general heading of takeovers. Takeovers can play a constructive economic role, for example by removing inefficient management or by achieving economies of scale and complementarity. On the other hand, they can have the possibly less desirable effect of redistributing wealth, as in takeovers that exploit tax benefits or expropriate bondholders or stakeholders. Finally, takeovers may reduce efficiency if they reflect agency problems on the part of bidding managers, or result simply from misjudgments. There are many important conflicts of interest and informational differences among parties to takeovers: bidding shareholders who only want an acquisition if the price of the target is not too high compared to underlying value, bidding management who may seek self-aggrandization through takeover, target shareholders who wish to obtain a price that fully reflects any possible takeover improvements, target management who wish to retain private benefits of control, and potential competing bidders deciding whether to make their own offers. This essay describes the relationships between different models of the takeover process, and where possible provides analytical syntheses to integrate major trends in the literature. I focus mainly on three types of models: (1) models of tender offers, which examine the decisions of individual shareholders whether to tender (sell) their shares to a bidder, (2) models of competition among multiple bidders, and (3) models that examine the voting power of target managers who own shares, l Beginning with (1), tender offers to purchase shares directly from shareholders are a crucial mechanism for overcoming management opposition to takeover,