Auctions with Endogenous Initiation

Abstract

We study strategic initiation of takeover contests by potential bidders and the target. After discovering the target, a bidder can approach it thereby putting it \in play. The target can preempt bidders and put itself for sale. We argue that the decision to approach the target reveals some information about the initiating bidder’s valuation of the target. In \common-value takeover contests, such as battles between two nancial bidders, this disincentivizes the initiating bidder from approaching the target. In pure common-value contests, unraveling occurs: Each bidder never approaches the target, no matter how high his valuation is. By contrast, this eect is limited in \private-value takeover contests, such as battles between two strategic bidders. Our analysis has implications for how bidders select targets, which deals are bidder- or target-initiated, and how bidding strategies depend on whether a bidder initiated the contest or was solicited by the target.