Competitive Strategy 411(i.e., all unaccepted shares) are bought for the lower $35 price. Therefore, the
averageprice received by a typical tendering shareholder is: (.5)(55) (.5)(35)
$45. This explains the $45 to $55 payoff range listed in the upper right entry.
(Note that if some other percentage of shareholders tendered, say 80 percent, the
prorating rule would mean each tendering shareholder would have 50/80 or
5/8 of her shares accepted. Consequently, in a successful tender offer, the aver-
age price obtained by any shareholder must lie between $45 and $55 per share.
Now that we’ve anticipated the possible payoffs facing shareholders, the
analysis is straightforward. Each shareholder should tender all of her shares, regardless
of the percentage of other shareholders who tender. Comparing the entries in the top
and bottom rows, we see that tendering is a dominant strategy for every share-
holder. (Note that $55 $50 and $45–$55 $35.) Because every shareholder
can be expected to tender, the acquisition easily succeeds and the typical share-
holder (after prorating) obtains an average price of $45 for her shares.
The extraordinary result is that the acquirer, by structuring a two-tiered
offer, pays an average price, $45, which is less than the market value of the tar-
get, $50. In other words, target shareholders are getting $5 per share less than
what the market deems the firm is worth. Collectively, shareholders are caught
in a financial “prisoners’ dilemma.” They would prefer to hold out for a higher
uniform price. But the acquirer has made them an offer that they, individu-
ally, can’t refuse. Although the two-tiered tender offer has been deemed to be
coercive, it has not been found to be illegal. Nonetheless, the majority of U.S.
states have enacted rules that effectively restrain the practice, and so with the
leveling of the financial playing field, the two-tiered strategy has all but disap-
peared over the last 15 years.COMPETITIVE STRATEGY
Strategic decisions by managers embrace an interesting mixture of competi-
tion and cooperation. Firms compete via price wars, patent races, capacity
expansion, and entry deterrence. But they also cooperate through joint ven-
tures, the adoption of common standards, and implicit agreements to maintain
high prices. The following competitive situations illustrate this blend of com-
petition and cooperation.A COMMON STANDARD FOR HIGH-DEFINITION DVDS Holding several times
the amount of information, the next generation of digital video disks (DVDs)
provides strikingly clear picture quality for movies, video games, and computer
graphics. Although the technological hurdles were overcome in 2005 and pro-
duction began in 2006, a key strategic question remained: Which technology
standard and format for DVDs would be adopted in the United States and world-
wide? In one camp, Sony Corporation led a group of companies including Sam-
sung, Matsushita, Philips, Dell Computer, and Hewlett-Packard promoting thec10GameTheoryandCompetitiveStrategy.qxd 9/29/11 1:33 PM Page 411