An Empirical Examination of the Rationale for Tender Offers

This study investigates the rationale behind acquisitions through tender offers by examining unsuccessful tender offers from 1985 to 2010. Four hypotheses are tested: information, synergy, agency and hubris. The study follows the approach in Bradley, Desai and Kim (1983) (BDK) and builds on their analysis by implementing the recent methodological advances in long run analysis. The proportion of unsuccessful acquisitions has declined significantly from 20 percent in 1985 to 5 percent in 2010. Contrary to the evidence presented in BDK, the results support both the information and synergy hypotheses. The study also examines correlations among target gain, total gain and acquirer gain to differentiate between synergy, agency and hubris hypotheses. The results suggest that, in addition to synergy, agency considerations have become increasingly important in explaining the unsuccessful acquisitions via tender offers in our sample period. We find no evidence in support of the hubris hypothesis. Cross-sectional analysis shows that the intensity of M&A activity in the target's industry, pre-announcement price run-up in the target, firm size, and absence of a poison pill provision increase the likelihood of unsuccessful targets being acquired within 5 years of the initial bid. Additionally, this study also finds by comparing unsuccessful initial bidders to their counterpart winning rival bidders that, bidders of larger size, more growth opportunities, and bidders in unrelated industries to that of the target and in less active M&A industries, are more likely to succeed in acquiring the target.