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“Matching Auctions” for Hostile Takeovers: A Model with Endogenous Target

  • Rosato, Antonio

In this paper we analyze incentives for a potential entrant to get into an oligopolistic Cournot-like market by taking over one of the incumbents and we derive the conditions under which the hostile merger is possible and profitable. The key-feature is that the target of the takeover is endogenously determined and this is also the main difference with respect to the previous literature on this topic. Actually, the main objective of our analysis is that of determining why and how the buyer chooses as target this firm rather than that one. The takeover game is modeled as a “matching auction” in which the potential entrant has to make a first and final offer and the other bidders are asked to match this offer. We find different types of SPNE depending upon the values of the parameters. Whenever entry takes place it reduces incumbents' profits and raises consumers' welfare at the same time.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15083.

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Date of creation: 26 Jun 2008
Date of revision: 07 Jan 2009
Handle: RePEc:pra:mprapa:15083
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  10. Sven-Olof Fridolfsson & Johan Stennek, 2001. "Why Mergers Reduce Profits and Raise Share Prices: A Theory of Preemptive Mergers," CIG Working Papers FS IV 01-26, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  11. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Finance 9903005, EconWPA.
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  13. Jozsef Molnar, 2002. "Preemptive Horizontal Mergers: Theory and Evidence," IEHAS Discussion Papers 0213, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  14. Schwartz, Alan, 1986. "Search Theory and the Tender Offer Auction," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 229-53, Fall.
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  18. Jehiel, Phillipe & Moldovanu, Benny, 1997. "Auctions with Downstream Interaction among Buyers," Sonderforschungsbereich 504 Publications 97-06, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  19. Yeon-Koo Che & Tracy R. Lewis, 2006. "The Role of Lockups in Takeover Contests," Discussion Papers 0607-03, Columbia University, Department of Economics.
  20. Levin, D., 1988. "Horizontal Mergers: The 50 Percent Bench-Mark," Papers 19, Houston - Department of Economics.
  21. Dasgupta, Sudipto & Tsui, Kevin, 2003. "A "matching auction" for targets with heterogeneous bidders," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 331-364, October.
  22. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  23. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  24. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
  25. Peter Cramton & Alan Schwartz, 1991. "Using Auction Theory to Inform Takeover Regulation," Papers of Peter Cramton 91jleo, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  26. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
  27. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  28. Harold M. Groves, Chairman, Universities-National Bureau Committee for Economic Research, 1962. "The Rate and Direction of Inventive Activity: Economic and Social Factors," NBER Books, National Bureau of Economic Research, Inc, number univ62-1, June.
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