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Bidder Asymmetry in Takeover Contests: The Role of Deal Protection Devices

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Author Info
Paul Povel (University of Minnesota)
Rajdeep Singh (University of Minnesota)

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Abstract

We analyze how a takeover contest should optimally be designed. Our key assumption is that not all bidders are equally well informed about a target's value. We present a three-stage sequential procedure which is optimal in such a setting. In this procedure, the target first offers an exclusive deal to a better informed bidder, without considering a less well informed bidder. If rejected, the target may offer an exclusive deal to the less well informed bidder and ignore the better informed bidder; or it may encourage every bidder to participate in a modified first-price auction. If the sequential procedure is used, increased bidder asymmetry is beneficial for target shareholders. We also find that target shareholders benefit if bidders are trade buyers and not financial buyers.

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Paper provided by EconWPA in its series Finance with number 0311011.

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Date of creation: 25 Nov 2003
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Handle: RePEc:wpa:wuwpfi:0311011

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Related research
Keywords: Takeovers; asymmetric information; lock-ups; termination fees; poison pills; bidder exclusivity;

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Find related papers by JEL classification:
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions

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References listed on IDEAS
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  1. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October. [Downloadable!] (restricted)
  2. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring. [Downloadable!] (restricted)
  3. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254. [Downloadable!] (restricted)
  4. Matthew Rhodes-Kropf & S. Viswanathan, 2000. "Corporate Reorganizations and Non-Cash Auctions," Journal of Finance, American Finance Association, vol. 55(4), pages 1807-1854, 08. [Downloadable!] (restricted)
  5. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 413-38, July.
  6. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 427-454, June. [Downloadable!] (restricted)
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  7. Officer, Micah S., 2003. "Termination fees in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 69(3), pages 431-467, September. [Downloadable!] (restricted)
  8. Fibich, Gadi & Gavious, Arieh & Sela, Aner, 2004. "Revenue equivalence in asymmetric auctions," Journal of Economic Theory, Elsevier, vol. 115(2), pages 309-321, April. [Downloadable!] (restricted)
  9. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  10. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March. [Downloadable!] (restricted)
  11. Israel, Ronen, 1991. " Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing," Journal of Finance, American Finance Association, vol. 46(4), pages 1391-1409, September. [Downloadable!] (restricted)
  12. Singh, Rajdeep, 1998. "Takeover Bidding with Toeholds: The Case of the Owner's Curse," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 679-704.
  13. Burkart, Mike, 1995. " Initial Shareholdings and Overbidding in Takeover Contests," Journal of Finance, American Finance Association, vol. 50(5), pages 1491-1515, December. [Downloadable!] (restricted)
  14. Matthew Rhodes-Kropf & S. Viswanathan, 2005. "Financing Auction Bids," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 789-815, Winter.
  15. Jeremy Bulow & Paul Klemperer, 2002. "Prices and the Winner's Curse," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 1-21, Spring.
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  16. Berkovitch, Elazar & Khanna, Naveen, 1990. " How Target Shareholders Benefit from Value-Reducing Defensive Strategies in Takeovers," Journal of Finance, American Finance Association, vol. 45(1), pages 137-56, March. [Downloadable!] (restricted)
  17. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(4), pages 733-64. [Downloadable!] (restricted)
  18. Estelle Cantillon, 2000. "The Effect of Bidders' Asymmetries on Expected Revenue in Auctions," Cowles Foundation Discussion Papers 1279, Cowles Foundation, Yale University. [Downloadable!]
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  19. Lee, D Scott, 1992. " Management Buyout Proposals and Inside Information," Journal of Finance, American Finance Association, vol. 47(3), pages 1061-79, July. [Downloadable!] (restricted)
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