Stock Price Performance Subsequent to the Expiration of a Tender Offer for Partial Ownership of Another Company

Abstract

Mergers and acquisitions have long been considered to be corporate investments worthy of special analysis. Research in the area of mergers has thoroughly investigated the rationality, profitability and valuation consequences to both target and suitor companies. Mergers, however, are only one form of corporate acquisition, an alternate form being the tender offer. A tender offer involves a cash or stock bid by one firm to purchase part or all of another firm's outstanding common stock at an established price, by a set date. The stockholders may elect to retain their ownership of the target firm or to accept the offer by tendering their shares before the expiration date. Work done in this area of corporate acquisitions has been limited, as an investment tool, to the analysis of a target firm's stock price movements prior to the announcement of a tender offer. Relatively little consideration has been given to movement subsequent to the expiration date of a tender offer. This paper examines stock price patterns subsequent to the expiration of a tender offer for partial ownership of another firm and introduces an investment algorythm which can yield exceptionally high returns over a short period of time. The basis for this algorythm lies in the premise that a control premium must be provided to shareholders of the target firm to induce them to tender their shares. Once a controlling interest is successfully secured by the tendering company, the control premium will no longer maintain the price of the target company's stock at an artificially high level above its normally traded value. It is believed and supported through empirical findings presented in this paper, that the price of the firm's untendered shares will fall, allowing investors to realize unusually high returns through the shortsale of the target firm's stock. The discussion proceeds as follows: Section I will recapitulate the efficient market hypothesis and discuss and critique current market efficiency testing methodologies. Section II will present several theories relative to the control premium and stock price performance subsequent to a tender offer for partial ownership of a company. Section III is a discussion of the background and procedures applied in this study. Section IV will discuss the empirical findings. Section V will critique both the findings and the model used.