Takeover Contests with Asymmetric Bidders (original) (raw)

The role of lockups in takeover contests

The RAND Journal of Economics, 2007

This paper examines breakup fees and stock lockups as devices for prospective target firms to encourage bidder participation in takeover contest. We show that, unless bidding costs for the first bidder are too high, breakup fees provide for the socially desirable degree of competition and ensure the efficient allocation of the target to the highest valued buyer in a takeover auction. In contrast, stock lockups permit the target firm to subsidize entry of a new bidder at the expense of an incumbent bidder. Stock lockups induce too much competition when offered to a second bidder and too little competition when offered to a first bidder. Despite their socially wasteful properties, target management would favor stock lockups as they induce takeover competition at least cost to the target.

Collusive Bidding in Hostile Takeovers

Journal of Economics <html_ent glyph="@amp;" ascii="&"/> Management Strategy, 1993

Bidders in hostile takeovers have colluded in five separate instances. It is found that these collusive agreements did not affect the target's price significantly. A model is developed to explain this observation. A welfare analysis indicates that a positive probability of cartel formation can be socially beneficial and may or may not be beneficial to the target's shareholders, depending on the process generating takeover attempts. This sheds light on the existing policy debate concerning regulations of collusive agreements. An analysis of the existing case law is provided, which indicates that such collusive arrangements are legal at present. 1. INTRODUCTION On exactly five occasions in the 1980s, bidders competing for a corporate takeover formed a cartel, stopped the bidding process, and acquired the target. In four of the instances, one bidder paid the other The authors thank Bradley Zanin for research support, and

Competition and dynamics of takeover contests

Journal of Corporate Finance, 2014

This paper investigates the e¤ect of potential competition on takeovers which we model as a bargaining game with alternating o¤ers where calling an auction represents an outside option for each bidder at each stage of the game. The model aims to answer three main questions: who wins the takeover? when? and how? Our results are able to explain why the takeover premium resulting from a negotiated deal is not signi…cantly di¤erent from that resulting from an auction, and why tender o¤ers are rarely observed in reality. Furthermore, the model allows us to draw conclusions on how other dimensions of the takeover process, such as termination fees, target resistance and tender o¤er costs, a¤ect its dynamics and outcome.

Conditional versus unconditional bidding in takeovers

Research in Economics, 2003

This paper explores the properties of multiple conditional takeover bids, and compares them with those of unconditional ones. If the initial takeover bid is unsuccessful, a raider is allowed to make a new tender offer to secure the required number of shares. Numerical analysis shows that the raider's expected profit from a conditional tender offer is higher than his expected profit from an unconditional bid, but still much lower than is predicted by static theories. However, the probability of a shareholder tendering his share is higher under the unconditional rather than conditional bidding. As the time between tender offers goes to zero, we show analytically that the expected profit from engaging in a conditional takeover bidding goes to zero similarly to the case of multiple unconditional offers.

Financing bidders in takeover contests

Journal of Financial Economics, 2015

This paper argues that endogenizing how acquirers finance their cash bids is just as important for understanding bidding in takeovers as endogenizing acquirers׳ payment method choice. The paper shows that acquirers finance their cash bids with equity only if they lack access to competitive financing. This leads to underbidding and lower takeover premiums. Conversely, acquirers with access to competitive financing use debt and overbid. Endogenizing the payment method reveals that security (e.g., stock) bids carry lower premiums than cash bids, backed by competitive financing. These insights find empirical support and could help explain existing evidence, which contradicts prior theory.

Can Targets Benefit from Negotiations? Evidence from Auctions and Negotiations

SSRN Electronic Journal, 2000

Prior theory generally suggests target shareholders benefit more from auctions due to increased bidder competition. Recent evidence, however, finds no difference in target shareholders' wealth effects whether the company is auctioned to multiple bidders or sold in a single bidder negotiation. Controlling for the self-selection bias stemming from management's private information inherent in this decision, we find auctions are associated with higher target cumulative abnormal returns and offer premiums. Focusing on the impact of various proxies of adverse selection risk and the uncertainty of future cash flows on the sale, we find that targets with more aggressive (or opaque) financial reporting are more likely to auction the firm and this strategy proves beneficial only when the uncertainty of future cash flows is high. When financial reporting is more transparent or the uncertainty of future cash flows is low, targets benefit more from single bidder negotiations.

Conditional and unconditional bidding in takeovers: experimental evidence

JOURNAL OF INTERNATIONAL STUDIES, 2015

The objective of this paper is to use laboratory experiments to test the dynamic theory of free riding among the target shareholders during a takeover attempt. We construct our experiments to reflect the dynamics of unconditional bidding suggested by Harrington and Prokop (1993) and the dynamics of conditional bidding analyzed by Prokop (2003). The experimental results show that the observed tendering probabilities are higher than the theoretically predicted values in the case of unconditional bidding. Thu s the actual behavior of shareholders is characterized by much less free riding than predicted by the theory of unconditional tender offers. In the case of conditional offers, the theoretical predictions for the tendering probabilities are confirmed by the laboratory behavior of shareholders in the case of multiple bidding. As suggested by the theory, the tendering probabilities are lower under multiple conditional bids than under unconditional offers.