Acquisitions as a Real Options Bidding Game

Han T.J. Smit (), Ward A. van den Berg () and Wouter De Maeseneire
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Han T.J. Smit: Faculty of Economics, Erasmus Universiteit Rotterdam
Ward A. van den Berg: Faculty of Economics, Erasmus Universiteit Rotterdam

No 04-084/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

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.

Keywords: Acquisitions; Competitive bidding; Real options; Resources; Option game (search for similar items in EconPapers)
JEL-codes: D81 D82 G30 G34 (search for similar items in EconPapers)
Date: 2004-06-16, Revised 2005-02-23
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Acquisitions as a real options bidding game (2005)
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