Tender Offer Auctions, Resistance Strategies, and Social Welfare

Abstract

In a seminal article, Easterbrook and Fischel argue that social welfare would be increased if corporate managers were precluded from conducting an auction for control of their firms once they had become the target of a tender offer. Auctions increase the price the successful bidding firm must pay for the target firm's shares. Though this ex-post wealth transfer (from the stockholders of the acquiring firm to those of the target firm) has no clear welfare implications, the ex-ante reduction in the gains to acquiring firms from an anticipated auction reduces the incentives of potential acquirers to search for potential targets. Thus, they argue that a legal regime that facilitates auctions will result in less search and fewer value-increasing takeovers. In conclusion, Easterbrook and Fischel advocate a mandated rule of passivity on the part of target managers. In a series of articles, Bebchuck (1982a; 1982b) and Gilson (1982) take exception to the Easterbrook and Fischel passivity rule and argue that social welfare is enhanced by allowing target managers to conduct auctions for their firms. They argue that the beneficial effects of moving the target's resources to their highest-valued use via an open auction outweigh what they consider to be the negligible deterrent effect on the incentives of potential acquirers to search for potential targets.