Optimal Sequential Selling Mechanism and Deal Protections in Mergers and Acquisitions

Abstract

We study the dynamic profit-maximizing selling mechanism in an M&A environment with costly bidder entry and without entry fees. Depending on the parameters, the optimal mechanism is implemented by a standard auction, or by a two-stage procedure with exclusive offers to one bidder followed by an auction potentially favoring that bidder. The optimal mechanism may involve common deal protections like termination fees, asset lockups, or stock option lockups. Our proposed procedures resemble sales of targets filing Chapter 11 bankruptcy or M&A involving public targets; they shed light on how to use deal protections in practice.

Keywords: M&A; Dynamic Mechanism Design; Costly Entry; Deal Protections; Termination Fee; Lockup

JEL Classification: G33, G34, D44, D82, D86