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What if the rules of the competition allow communication between play-

ers, and what if binding agreements are possible? Under these cooperative

ground rules, players should agree to take actions to achieve the mutually ben-

eficial “upper-left” payoffs. Thus, firms would want to agree to charge high

prices, and superpowers would strive to negotiate a binding and verifiable arms-

control treaty. We will say more about the possibilities of reaching such agree-

ments in our later discussion of repeated competition.

A common takeover tactic in the 1980s and early 1990s was the “two-tiered”

tender offer. Here is a bare-bones example of how this kind of offer works.

Suppose that firm A (the acquiring firm) is seeking to gain control of firm T

(the target). Firm T’s current (i.e., pre-tender) stock price is $50 per share.

Firm A offers a price of $55 per share for 50 percent of firm T’s outstanding

shares. If 50 percent of shareholders (induced by this price) tender their

shares, this percentage will be just enough for firm A to gain control of firm T.

In keeping with a two-tier strategy, firm A offers only $35 per share for the

remaining 50 percent of shares.

Does this two-tiered offer strategy make sense? Will firm A succeed in gain-

ing control? Or will it pay a high $55 price per share but receive only a minor-

ity of shares, meaning the takeover will fail? The payoff table below depicts the

strategic landscape from the typical shareholder’s point of view. The share-

holder has two options: to tender her shares or to retain them. The columns

show that the shareholder’s payoff depends on her action andon whether or

not the acquisition proves to be successful.

Tender

Tender Fails Succeeds

(S50%) (S50%)

Tender $55 $45–$55

Typical

Shareholder

Retain $50 $35

Let’s check the payoff entries. The first column entries show that if the ten-

der fails, those who tender shares receive $55, while those who retain theirs

see their shares’ value remain at the pre-acquisition level of $50. If the tender

succeeds, the average price received by those who tender depends on the over-

all percentage of shares that are offered. If exactly 50 percent of shareholders

tender, each tendering shareholder receives $55. At the opposite extreme,

what if 100 percent of shareholders tender? Because firm A only buys 50 per-

cent of outstanding shares, each shareholder’s offer is prorated, meaning that

half of its tendered shares are accepted at $55 and the other half are not

accepted. After the acquisition is successfully completed, all remaining shares

410 Chapter 10 Game Theory and Competitive Strategy

Two-Tiered

Tender Offers

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