Optimal Sequential Selling Mechanism and Deal Protections in Mergers and Acquisitions

88 Pages Posted: 2 Mar 2021 Last revised: 2 Feb 2022

See all articles by Yi Chen

Yi Chen

Cornell University

Zhe Wang

Pennsylvania State University

Date Written: January 27, 2022

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

Suggested Citation

Chen, Yi and Wang, Zhe, Optimal Sequential Selling Mechanism and Deal Protections in Mergers and Acquisitions (January 27, 2022). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3795826 or http://dx.doi.org/10.2139/ssrn.3795826

Yi Chen

Cornell University ( email )

Ithaca, NY 14853
United States

Zhe Wang (Contact Author)

Pennsylvania State University ( email )

343 Business Building
University Park, PA 16802
United States

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