Private Benefits of Control in Corporate Acquisitions

The book identifies efficiency costs in corporate control auctions distorted by the valuable extractability of private benefits from control of the auctioned firm by potential acquirers. Such costs may entail suboptimal control transfers to the extent that the present value of all future private benefits constitutes an element of the competing bidders’ valuation of the target. To avoid those efficiency costs the book proposes a dilution warrants mechanism. The mechanism essentially presumes that control premia relative to the postacquisition target share market price reflects private benefits. Thus the dilution warrants confer: (1) on the target’s minority shareholders an opportunity for compensation; and (2) on potential acquirers a disincentive to pay a premium in the prospect of extracting private benefits of control.