Targeting target shareholders∗

We integrate heterogeneity and uncertainty in investor valuations into a model of takeovers. Investors have dispersed valuations, holding shares in firms they value more highly, and a successful offer must win approval from the median target shareholder. We derive the consequences for an acquiring firm’s takeover offer—its size and cash/equity structure—and implications for takeover premia and firm returns. Cash offers are best for the acquirer when the acquirer’s own valuation is high relative to target shareholders. Equity offers are best given the reverse. The acquirer’s share price always rises following cash acquisitions, but can fall following equity offers. The combined target-acquirer return is always higher after cash acquisitions than equity acquisitions (which can be negative). We characterize how synergies and uncertainty about target shareholder valuations affect the optimal offer and probability a takeover succeeds. ∗We thank Jie Gan and seminar participants at Arizona State University, Central University of Finance and Economics, and Cheung Kong Graduate School of Business for helpful comments. Address for correspondence: Dan Bernhardt (corresponding author), University of Illinois, Champaign IL 61801 [email protected], tel: 217-244-5708, fax: 217-244-6678; Tingjun Liu, Cheung Kong Graduate School of Business, [email protected]; Robert Marquez, University of California at Davis, [email protected]. Targeting target shareholders