A Theory of Initiation of Takeover Contests

60 Pages Posted: 7 Aug 2017 Last revised: 28 Mar 2018

Alexander S. Gorbenko

University of Southern California - Marshall School of Business

Andrey Malenko

MIT Sloan School of Management

Date Written: February 16, 2018

Abstract

We study strategic initiation of auctions by potential buyers and the seller. This problem arises in auctions of companies and asset sales, among other contexts. The bidder's decision to approach the seller reveals that her valuation is sufficiently high. In common-value auctions, such as battles between financial bidders, this revelation effect disincentivizes bidders from approaching the seller. In pure common-value auctions, no bidder ever approaches and auctions are seller-initiated. By contrast, in private-value auctions, such as battles between strategic bidders, the effect is the opposite, and equilibria can feature both seller- and bidder-initiated auctions. The model points to a role of shareholder activists, investment banks as intermediaries, and toeholds in the M&A market. Finally, the model generates testable implications about the link between the initiating party, bids, and sale outcomes.

Keywords: auctions of companies, auction design, mergers and acquisitions

JEL Classification: D44, G34

Suggested Citation

Gorbenko, Alexander S. and Malenko, Andrey, A Theory of Initiation of Takeover Contests (February 16, 2018). Available at SSRN: https://ssrn.com/abstract=3014110 or http://dx.doi.org/10.2139/ssrn.3014110

Alexander S. Gorbenko

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Andrey Malenko (Contact Author)

MIT Sloan School of Management ( email )

100 Main Street
E62-619
Cambridge, MA 02142
United States
617-225-9301 (Phone)

HOME PAGE: http://www.mit.edu/~amalenko

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