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RFS Advance Access published online on February 23, 2006
Review of Financial Studies, doi:10.1093/rfs/hhj034
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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

Article

Takeover Contests With Asymmetric Bidders

Paul Povel 1 * and Rajdeep Singh 2
1 Carlson School of Management, University of Minnesota, Minneapolis, MN 55455
2 Carlson School of Management, University of Minnesota

* To whom correspondence should be addressed.
Paul Povel, E-mail: povel{at}umn.edu


  Abstract

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 either offers 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.


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