Takeover Bids, Price Offer and Investors Protection

Abstract

In this paper, we develop a contingent claim analysis concerning both inside and outside shareholders' rights to sell their shares at the acquisition bid price. We will show that this regulation brings about wealth transfer towards inside shareholders (compared to a situation without any guarantee). A second question can be formulated as follows: why, in an apparently irrational way, do the outside shareholders, who may benefit from a price guarantee, not systematically sell their shares? That question emphasizes on the outside shareholders' behavior. In theory, it appears that equal treatment between inside and outside shareholders may lead outside ones to sell their shares. We put into evidence that an unconditional price guarantee for minor investors induces an apparent transfer of wealth which is equal to the put option they are given. This implicit put is evaluated as an abandon option. The improvement in the treatment of the outside investors can be a pure illusion because a rational buyer should take it into account in his economic setting of the takeover bid. This put is paid by the new controlling investor who is aware of that. What is also outlined is that, in fact, the price guarantee mechanism imply a disclosure of information because the buyer is led to evaluate wealth transfer implied by the financial regulation of some European countries. The buyer is not passive, he can play with the bid acquisition price and the target participation rate. Moreover, to minimize the cost of a given put option, the major shareholder can increase his participation rate. In doing that, he will tend to expel the minor investors by exercising their put option. We saw that, in this framework, a unique equilibrium exists between the two parties, each one maximizing its wealth in this new environment. It is quite possible that this equilibrium can be the same (or can be better) for the outside investors compared with a no protection case. We also noticed that a more general setting of the choices should also take into account the possibility of direct appropriation of the cash-flow by the controlling investor.