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RFS Advance Access originally published online on February 23, 2006
Review of Financial Studies 2006 19(4):1399-1431; doi:10.1093/rfs/hhj034
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Right arrow G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Takeover Contests with Asymmetric Bidders

Paul Povel
Carlson School of Management, University of Minnesota

Rajdeep Singh
Carlson School of Management, University of Minnesota

Address correspondence to Department of Finance, Carlson School of Management, University of Minnesota, Minneapolis, MN 55455, or e-mail: povel{at}umn.edu and rajsingh{at}umn.edu.

Target firms often face bidders that are not equally well informed, which reduces competition, because bidders with less information fear the winner’s curse more. We analyze how targets should be sold in this situation. 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 offers either an exclusive deal to the less well-informed bidder, or a modified first-price auction. Deal protection devices can be used to enhance a target’s commitment to the procedure. (JEL G34, K22, D44)


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