Bidder Asymmetry in Takeover Contests: The Role of Deal Protection Devices

Paul Povel () and Rajdeep Singh
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Rajdeep Singh: University of Minnesota

Finance from EconWPA

Abstract: We 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.

Keywords: Takeovers; asymmetric information; lock-ups; termination fees; poison pills; bidder exclusivity (search for similar items in EconPapers)
JEL-codes: G34 D44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-ind
Date: 2003-11-25
Note: Type of Document - pdf; prepared on WinXP; to print on any;
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0311011

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