How should a startup respond to acquirers? A real options analysis

Michi Nishihara ()
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Michi Nishihara: Graduate School of Economics, Osaka University

No 20-24, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: Many startups have recently opted for sellout to large firms with great market power and profit margins. This paper attempts to understand and guide such startup sellout decisions by developing a model in which the firm reacts to random approaches of high- and low-type acquirers. Optimally, the startup takes either a high-price strategy?accepting only a high-type acquirer in a good economic state? or a flexible strategy?accepting a high-type acquirer in an intermediate economic state and either type in a good economic state? based on a tradeoff between sellout pricing and timing efficiency. With asymmetric information, where the acquirer types are unobservable, the startup accepts a high-price acquisition more eagerly and a low-price acquisition more restrictively to reduce the acquirer fs information rent. Then, asymmetric information increases the probability of a high-price sellout and delays the sellout. A model analysis shows that the market parameters as well as anticipation of acquirers (i.e., the acquirers f arrival rate, valuation, and transparency) greatly affect the sellout price, sellout timing, firm value, and stock price reaction.

Keywords: M&A; real options; selling process; liquidity; asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 G13 G34 (search for similar items in EconPapers)
Pages: 33pages
Date: 2021-03
New Economics Papers: this item is included in nep-com
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