Why Tender Offers? The Efficient Market Hypothesis, the Supply of Stock, and Signaling

Abstract

* John M. Olin Fellow in Law and Economics, University of Chicago Law School; Associate Professor, California Western School of Law (on leave). I gratefully acknowledge the valuable comments of Bruce Johsen and participants in the University of Chicago Law School Law and Economics Workshop. ' See, for example, Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965); Henry G. Manne, Tender Offers and the Free Market, 2 Mergers & Acq. 91 (1966); Henry G. Manne, Salute to Raiders, Barron's 1 (October 23, 1967); Henry G. Manne, Cash Tender Offers for Shares-A Reply to Chairman Cohen, 67 Duke L. J. 231 (1967); Michael Bradley, Interfirm Tender Offers and the Market for Corporate Control, 53 J. Bus. 345 (1980); Frank H. Easterbrook & Daniel R. Fischel, Corporate Control Transactions, 91 Yale L. J. 698 (1982); Ronald J. Gilson, A Structural Approach to Corporations: The Case against Defensive Tactics in Tender Offers, 33 Stan. L. Rev. 819 (1981); Daniel R. Fischel, Efficient Capital Market Theory, the Market for Corporate Control, and the Regulation of Cash Tender Offers, 57 Texas L. Rev. 1 (1978); Separate Statement of Frank H. Easterbrook and Gregg A. Jarrell (Separate Statement) SEC Advisory Committee on Tender Offers: Report of Recommendations 70 (July 8, 1983), Federal Sec. Rep. (CCH Special Report No. 1028, July 15, 1983). Note, however, that the Separate Statement was a minority report. Those on the other side of the debate are still a majority among the leading practitioners. For the views of a practitioner, Martin Lipton, who has grown wealthy fighting takeovers (Even Lawyers Gasp over the Stiff Fees of Wachtell Lipton, Wall St. J., November 2, 1988, at 1, col. 4), see Martin Lipton, Takeover Bids in the Target's Boardroom, 35 Bus. Law. 101 (1979); and, more recently, Martin Lipton, Corporate Governance in the Age of Finance Corporatism, 136 Univ. Penn. L. Rev. 1 (1987). Although declining in influence in the academic community, opponents of tender offers are not without their voice. See, for example, Robert B. Reich, The Next American Frontier 140-72 (1983) (dismissing tender offers as paper entrepreneurialism); Louis Lowenstein, Pruning Deadwood in Hostile Takeovers, 83 Colum. L. Rev. 249 (1983). 2 See, for example, Douglas A. Austin & Jay A. Fishman, The Tender Take-over, Mergers & Acq. 4 (1969), showing that 83.8 percent of the 104 target companies had profit margins