48 Pages Posted: 26 Mar 2020 Last revised: 4 Nov 2021
Date Written: May 7, 2021
We analyze takeover financing in a model where bidders must overcome the free-rider problem to restore ownership incentives. Bootstrapping, "excessive" debt levels, and negative financing contributions by bidders – the controversial traits of leveraged buyouts – emerge as the Pareto efficient takeover bid design. Takeover debt is crucial to equity consolidation, Pareto sharing of the incentive gains, and efficient takeover competition, all while wealth constraints are slack. These benefits are unique to the market for corporate control, that is, absent outside of takeovers.
Keywords: Leveraged buyouts, bootstrap acquisitions, tender offers, free-rider problem, debt overhang, private equity
JEL Classification: G34, G32
Suggested Citation: Suggested Citation