Tailwind and Headwind Bidding in German Takeover Offers – The Impact of Price Runups on Takeover Success

Abstract

Pre-bid target share price runups are increasing the cost of takeovers and thus are seen as a detriment for the efficiency of the market for corporate control. This paper investigates the three-way relationship of pre-bid runups, offer premia and takeover success with a sample of 324 takeover offers of German publicly listed companies from 2006 to 2019. Germany is of particular interest as the minimum offer price required by takeover law is the 3 month average stock price of the target (VWAP). Combined with price runups or rundowns be-fore the offer this regulation creates “headwind” and “tailwind” environments for the bid-der: In case of a runup, the stock price at the offer is higher than the VWAP and thus a positive premium on the VWAP may not be sufficient to create a positive premium on the current stock price (“Headwind”). If the pre-bid stock price decreases, the VWAP is higher than the current stock price and the legal minimum requirement automatically enforces a positive premium on the current stock price (“Tailwind”). This asymmetry in setting the of-fer price is hypothesized to additionally reduce the chances of an offer being successful. Our results support this hypothesis. While we document a general significant negative ef-fect of runups on takeover success we also show that the impact of the (VWAP) premium on takeover success is significantly higher in headwind than in tailwind environments. Our results further suggest that offer announcements in the German takeover market are pre-ceded by significant price runups and that these are only partly substituted by lower markups.