A theory of acquisition markets: mergers versus tender offers, and golden parachutes

We develop a model of the acquisition market in which the acquirerhas a choice between two takeover mechanisms: mergers and tenderoffers. A merger is modeled as a bargaining game between theacquiring and target firms; whereas a tender offer is modeledas an auction in which bidders arrive sequentially an competefor the target. At any stage of the bargaining game the acquiringfirm can stop negotiating and make a tender offer. In equilibrium,there is a unique level of synergy gains below which the acquiringfirm makes only a merger attempt as it expects to lose in thecompetition resulting from a tender offer. For synergy gainsabove this level, tender offers can occur. However, to get tenderoffers, target shareholders must give their managers gold parachutesthat give higher payoffs in tender offers than in mergers.