Minority Blocks and Takeover Premia: Comment

Abstract

In their paper Burkart, Gromb, and Panunzi [2006] (hereinafter BGP) analyze the effect of initial ownership structure on the takeover premia. They consider a company with a single minority blockholder and otherwise dispersed ownership. Though the blockholder is bound to a passive role as a tendering shareholder, their analysis shows that his sole presence can lead to higher bidding prices in a takeover. The analysis is based on the notion, developed by Grossman and Hart [1980] and Bradley [1980], that due to shareholders' free-riding behavior companies with dispersed ownership are an unprofitable target for takeovers. According to this, rational shareholders only tender if the bidding price matches the posttakeover value, leaving no profit to the raider. A remedy is found in the extraction of private benefits, which leaves some profit to the controlling party. BGP assume those private benefits for both the incumbent blockholder and the raider. These private benefits determine at least partly the participants' choices. While the benefit A for the incumbent blockholder is considered exogenous and fixed, the raider's benefit 0 is endogenous. This means the raider, R, can freely decide upon the amount of resources diverted, though at the cost of a welfare loss /( ). The extraction of private benefits is pivotal to the analysis, which is why I will focus on these in this comment. In particular, I consider the raider's benefit extraction technology, i.e., his efficiency in diverting resources, and the role of the incumbent blockholder.