A Theory of Initiation of Takeover Contests
60 Pages Posted: 7 Aug 2017 Last revised: 28 Mar 2018
Date Written: February 16, 2018
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: Suggested Citation