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The Role of Lockups in Takeover Contests

  • Yeon-Koo Che

    ()

    (Columbia University)

  • Tracy R. Lewis

    ()

    (Duke University - Economics Group)

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.

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Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0607-03.

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Length: 39 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:clu:wpaper:0607-03
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