Optimal Structure of the Consideration in Mergers and Acquisitions

We analyze acquirers' wealth maximizing acquisition strategy when competing for a target. We allow acquirers to make either one-tier or two-tier offers. We show that a two-tier offer strategy will be used when target shareholders have sufficiently large differences in their valuations of the considerations offered, for example due to taxes. However, when shareholder heterogeneity is small, one-tier offers always defeat two-tier offers. Our model also explains the stylized fact that successful two-tier offers are over-subscribed (i.e., structured such that the number of shares tendered exceeds the number sought). Finally, for intermediate levels of valuation heterogeneity neither one- nor two-tier offers are uniquely optimal and acquirers will randomize their offer strategies or resort to preemptive offers, that is, offers that exceed the reservation value of their opponent. The latter is more likely to occur when the difference between the two acquirers' reservation values is high.