Bidder Asymmetry in Takeover Contests: The Role of Deal Protection Devices
AbstractWe 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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Date of creation: 25 Nov 2003
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Takeovers; asymmetric information; lock-ups; termination fees; poison pills; bidder exclusivity;
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-30 (All new papers)
- NEP-CFN-2003-11-30 (Corporate Finance)
- NEP-IND-2003-11-30 (Industrial Organization)
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