Anatomy of a Split-Off: Bristol-Myers Squibb

Essay

Anatomy of a Split-Off: Bristol-Myers Squibb
Under the Bristol-Myers Squibb exchange offer of Mead Johnson shares for shares of its common stock, announced on November 16, 2009, each BMS shareholder would receive $1.11 for each $1 of BMS stock tendered and accepted in the exchange offer. The exchange was subject to an upper limit of 0.6027 shares of MJ common stock per share of BMS common.
On December 4, 2009, BMS amended the offer by increasing the maximum share exchange ratio to 0.6313, indicating it would accept for exchange a maximum of 269,281,601 shares of its stock and that if the exchange offer were oversubscribed, all shares tendered would be subject to proration. The proration formula was be determined by dividing the maximum number of MJ shares BMS was willing to exchange by the number of BMS shares actually tendered.
The actual ratio at which shares of Bristol-Myers common stock and shares of Mead Johnson common stock were exchanged was determined by computing a simple three-day average of the shares of the two firms during December 8-10, 2009, subject to the 0.6313 upper limit. On December 16, 2009, Bristol-Myers announced it would exchange up to 170 million share of Mead Johnson common stock (i.e., all that it owned) for outstanding shares of its stock at an exchange ratio of 0.6313 shares of Mead Johnson common stock for each share of Bristol-Myers common stock tendered and accepted in the exchange offer.
Assuming that the three-day average of BMS and MJ share prices was $24.30 and $43.75, respectively, BMS shareholders whose tendered shares were accepted in the exchange offer received the higher of $26.97 . Fractional shares were paid in cash.
The actual number of BMS shares tendered totaled 500,547,697, resulting in a proration ratio of 53.80% . Each shareholder tendering BMS shares would only have 53.80% of their tendered shares accepted for the exchange.
-Why did Bristol-Myers Squibb prorate the number of shares tendered in the exchange offer?