The Optimal Strategy of the Initial Bidder in Takeover Contests: Theory and Empirical Evidence

30 Pages Posted: 19 Jun 2006

See all articles by Dušan Isakov

Dušan Isakov

University of Fribourg (Switzerland) - Faculty of Management, Economics and Social Sciences

Philippe Cornu

HEC, University of Geneva, Switzerland

Date Written: December 1999

Abstract

This paper investigates the optimal bidding strategy for the initial bidder in takeover contests. In the theoretical model, the initial bidder has the choice between making a low or a high preemptive initial bid. Both types of bids can lead to a competitive auction process among bidders, and both information and bidding costs are included in the analysis. Optimal strategies are specified following the Perfect Bayesian Equilibrium. The model predicts notably that the optimal strategy for the initial bidder is to make a high preemptive initial bid. This strategy deters potential bidders to compete for the same target. The empirical implications of the theoretical model are then examined on US data over the period 1990-1995. Among other results, the relation between the level of bid premiums and the degree of competition is found to be dependent on the type of offer, i.e. hostile or friendly.

Keywords: Takeovers, Competitive bidding, Bid premium

JEL Classification: G34, C72

Suggested Citation

Isakov, Dušan and Cornu, Philippe, The Optimal Strategy of the Initial Bidder in Takeover Contests: Theory and Empirical Evidence (December 1999). Available at SSRN: https://ssrn.com/abstract=908812 or http://dx.doi.org/10.2139/ssrn.908812

Dušan Isakov (Contact Author)

University of Fribourg (Switzerland) - Faculty of Management, Economics and Social Sciences ( email )

Fribourg, CH 1700
Switzerland

HOME PAGE: http://www3.unifr.ch/cgf/en/

Philippe Cornu

HEC, University of Geneva, Switzerland

40, Boulevard du Pont-d'Arve
Genève, CH - 1205
Switzerland