Takeover Bids, Defensive Stock Repurchases, and the Efficient Allocation of Corporate Control

Abstract

The objective of this paper is to define a simple form of "fair" competition between the manager and the raider for corporate control, and then explore the characteristics of the resulting allocation process. In particular, we let the raider make one any-or-all bid for sharaes in the firm, and allow the manager to respond by declaring support or opposition and if opposition by making a bid to repurchase a fixed number of the outstanding shares. In doing so, we rule out a variety of defensive tactics, such as greenmail, poison pills, or simply imposing endless delays on the process, since these tactics are available only to the manager and so are "unfair." Use of a repurchase bid as a defensive tactic has become more common recently, and we provide a formal analysis of when and why it can be used successfully.