Hedge Fund Activism vs. Hostile Takeover Bids⇤

We compare hedge fund activism and hostile tender offers in a unified framework where any investor who acquires an equity stake to improve firm value faces a dual free-rider problem: Neither do dispersed shareholders sell their shares unless the price fully reflects the anticipated value improvement nor do those who retain their shares participate in the costs. We show that activism and tender offers are polar approaches to this problem, and in terms of profitability, react contrarily to changes in the marginal return to effort. Activists can hence contribute to a more efficient control allocation by brokering takeovers, along the extensive margin (takeover activity) as well as the intensive margin (ownership concentration), partially obviating tender offers. We also show that pre-campaign coordination between bidders and activists reduces hold-up problems, and that allowing activists to disentangle votes and cash flow rights improves their incentives and ultimately serves to unify both sets of rights in the hands of bidders.