We examine whether a bidder can use the terms of the tender offer to signal the post-takeover security benefits. As atomistic shareholders extract all the gains in security benefits, signaling equilibria are subject to a constraint that is absent from bilateral trade models. The buyer (bidder) must enjoy gains from trade that are excluded from bargaining (private benefits), but can nonetheless be relinquished and enable shareholders to draw inference about the security benefits. Restricted bids and cash-equity offers do not satisfy these requirements. Dilution, debt financing, probabilistic takeover outcomes and toeholds are all viable signals because they make bidder gains depend on the security benefits in a predictable manner. In all the signaling equilibria, lower-valued types must forgo a larger fraction of their private benefits and these signaling costs prevent some takeovers. When there is additional private information about the private benefits as in the case of two-dimensional bidder types, fully revealing equilibria cease to exist. This does not hold once bidders can offer not only cash or equity but also (more) elaborate contingent claims. Offers which include options avoid inefficiencies and implement the symmetric information outcome.
Joint work with Samuel Lee (Stockholm School of Economics).