An analysis of bid premiums in acquisition offers for Forbes 500 firms: 1979-1983

An offer price substantially higher than the target's stock market price at the time of the offer is a standard feature of corporate takeover attempts. This dissertation examines empirically the determinants of the price offered to target shareholders in corporate acquisitions of Forbes 500 firms between 1979 and 1983. The first chapter posits a theory of control which is used to create a model of bid price determination. Bidders maximize the expected net present value of the acquisition attempt. In doing so, they offer a unique price that depends on the sources of value enhancement and on their estimate of the probability of success of the bid. The second chapter empirically implements this bid model. For tender offers, a three equation simultaneous system in which bid premium, success probability and target management resistance are endogenous is employed. For mergers, the system condenses to a single equation in which bid price is a function of value enhancement. An original data set of Forbes 500 targets is used. Determinants of the bid premium are found to differ between mergers and tender offers. Target liquidity, dividend payout, size, and success probability are significant determinants of premiums in tender offers while profitability and market to book value are significant for mergers. The third chapter uses the event study methodology to examine the abnormal returns accruing to both target and bidder shareholders. Consistent with the literature, it is found that target shareholders receive significant positive wealth gains while bidders receive neither gains nor losses. This chapter continues on to explore the relationship between the size of the premium offered and the wealth gains accruing to the participants. For targets the percent of the premium that is incorporated into the returns indicates tha market's expectations of success probability. It is found that the average expectation is fifty-four percent while the true probability is forty-five percent. For bidders, there appears to be a significant negative relationship between the size of the premium and the abnormal returns accruing to shareholders.