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Comments by Larry D. Wall*On

“Does Patience Pay? Empirical Testing of the Option to Delay Accepting a Tender Offer in

the U.S. Banking Sector ”by

Rachel A. Campbell and

Roman Kräussl

• Federal Reserve Bank of Atlanta. Opinions are those of the discussant and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System

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Overview of Paper• Goal is to estimate the potential gain to target

shareholders of delaying acceptance of a takeover offer for their bank

• Method is to treat the potential for delay as a real option.

– The paper assumes initial takeover proposal takes the form a tender offer

– Shareholders then have the option of accepting this tender offer or waiting to see if a better one if it arrives

• Thus, paper revolves around determining the value of this real option

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CommentsTender offer assumption

• The assumption that the initial takeover proposal comes in the form of a tender offer is crucial to use of option framework

– Ordinarily the buyer of an option pays an up front purchase price

• Thereafter the buyer has no further risk of loss

– Tender offer is essentially a free option to accept that offer or accept a better offer if one arises

• But in negotiated deals the target does not have a firm offer until both sides agree to the takeover

– As a result the price in negotiated deals could go up or down

– Options pricing questionable for looking at negotiated deals

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CommentsTender offer assumption

• How common are tender offers in bank mergers?

• In my experience in US banking they are rare

– Tender offers frequently used in hostile takeover situations

– Hostile offers are very rare in commercial banking

– Vast majority are negotiated in my experience

• Implication is that delay is likely not a free option in almost all bank takeovers

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CommentFocus of the exercise

• Delay could result in an higher offer

– The intrinsic value of the target may increase between the initial offer and the final offer

– Later takeover proposals may propose a higher premium over the target’s intrinsic value

• First potential acquirer could offer a higher premium

• Another potential acquirer could offer a higher premium

• The paper appears to examine only changes in intrinsic value

– Key parameter is volatility and this is estimated “directly” which implies from historic data that would be dominated by changes in intrinsic value

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CommentsPeriod of time for option calculation

• The time to expiration (or maturity) of an option is an important determinant of its value.

• The value of the option monotonically increase with its time to maturity

• The paper calculates this time as:

“the announcement and closing dates of the deals were obtained in order to calculate the time to maturity.”

• Procedure has errors on both sides

– Negotiations begin before the announcement

– This assumption appears to have the effect of including all regulatory based delays in the valuation

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CommentTreatment of Dividends

• Dividends are treated as a cost of delay in the real options model. The paper states

Dividends represent a cash-outflow of the underlying asset that cannot be captured anymore by the holder of the option and the value of the option decreases.

• This is certainly true if the shareholder and the option holder are different people

• But in this case the shareholder receiving the dividend is also the person that has the option to sell at a higher price

• Hence its not obviously a cost of delay

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SuggestionPaper Values Risk due to Lags

• The lag between time negotiations start and consummation of takeover add risk to both parties

– Target may increase in value benefiting target shareholders and hurting acquirer

– Or target may decrease in value which benefits the acquirer at the expense of the target

– Net cost if both parties are risk averse

• Relevance

– Target and acquire have incentive to minimize the cost of the lags

• Including negotiating when values are more stable

– Help measure part of the costs due to lags in supervisory approval process (including DOJ)

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CommentMinor comments

• Target SIC codes includes 6082

– The OSHA web site defines 6082 as “Branches and Agencies of Foreign Banks” which do not seem relevant to this study

• What exactly is ST? Is ST known at time t or is it a random variable? Given that the St is share price before the acquirer made the tender offer, the natural interpretation of ST is that it is the share price in the market at time T, in which case it would be a random variable.