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Acquisitions as a Real Options Bidding Game

Author

Listed:
  • Han T.J. Smit

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • Ward A. van den Berg

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • Wouter De Maeseneire

    (Ghent University, and Erasmus Universiteit Rotterdam)

Abstract

This paper uses a unified treatment of real options and game theory to examine value appropriation in takeovers within a competitive environment of imperfect information. The integrated model considers a potential target as a shared real option on a bundle of resources. Competing potential buyers may sequentially perform due diligence and incur costs (option premium) to become informed about their firm-specific target value (underlying value) before making a bid (exercise price). The first player’s bid provides a signal on its own and rivals’ target value, thereby affecting potential bidders’ option value. The level of information costs and the option value, affected by heterogeneity between bidders (correlation), their expected target value, and uncertainty, determine value appropriation in acquisitions.

Suggested Citation

  • Han T.J. Smit & Ward A. van den Berg & Wouter De Maeseneire, 2004. "Acquisitions as a Real Options Bidding Game," Tinbergen Institute Discussion Papers 04-084/2, Tinbergen Institute, revised 23 Feb 2005.
    • Handle: RePEc:tin:wpaper:20040084
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    Cited by:

    1. Toxvaerd, Flavio, 2008. "Strategic merger waves: A theory of musical chairs," Journal of Economic Theory, Elsevier, vol. 140(1), pages 1-26, May.

    More about this item

    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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