Takeover Contests with Asymmetric Bidders

Abstract

Target firms are often faced with bidders that are not equally well informed. This reduces the competition between the bidders, since a less well informed bidder fears the winner's curse more. We analyze how a target should optimally be sold in the presence of asymmetric bidders. We show that a sequential procedure can extract the highest possible transaction price. The target first offers an exclusive deal to a better informed bidder, without considering a less well informed bidder. If rejected, the target either offers an exclusive deal to the less well informed bidder (now ignoring the better informed bidder), or it encourages every bidder to participate in a modified first-price auction. We discuss the key factors that affect the optimal procedure, how deal protection devices can mitigate commitment problems, and also some empirical implications.

Keywords: Takeovers, asymmetric bidders, MBOs, deal protection devices

JEL Classification: G34, K22, D44