Horizontal Mergers with Synergies: Cash vs. Profit-Share Auctions

Abstract

We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target and bidders can influence rivals' beliefs through their bids. We compare cash and profit-share auctions, first- and second-price, supplemented by entry fees. Since non-merged firms benefit from a merger if synergies are low, bidders are subject to a positive externality with positive probability; nevertheless, pooling does not occur. Unlike cash auctions, profit-share auctions are not revenue equivalent, and the second-price profit-share auction is more profitable than the other auctions.

Keywords: Horizontal mergers, Takeovers, Auctions, Externalities, Oligopoly

JEL Classification: G34, D44, H23, L13, D43