The Dynamics of Takeovers Through Exchange Offers

Abstract

This study proposes a dynamic model of acquisitions made by means of exchange offers. The model incorporates the process of the takeover bid, ex-change of shares, and completion of a merger. The optimal strategies for relevant players are derived using a dynamic programming approach. Although the takeover process is designed without introducing a Pareto optimality, it is shown that the model leads to the same takeover strategies as those of an equilibrium model, under certain conditions. The implications of the model for acquisition premiums paid to target shareholders are consistent with the empirical evidence.