THE DYNAMICS OF THE FREE-RIDER PROBLEM IN TAKEOVERS

We explore the dynamics of a takeover bid. In contrast to preceding mo dels, if the initial takeover bid is unsuccessful a raider is allowed to make a new tender offer in order to try and secure the remaining sh ares. Numerical analysis shows that the raider's tender offer rises ov er time as be accumulates more shares. The anticipation of a higher te nder offer in the future makes shareholders more inclined to bold thei r shares and forces the raider to offer a higher premium than is predi cted by static theories. As the time between tender offers goes to zer o, we show analytically that the expected profit from engaging in a ta keover goes to zero.