Multiple Motivations Consequences on Bidder's Optimal Strategy in Takeover Contests

Abstract

This paper examines the optimal bidding strategy in takeover contests for a target firm, and the positive correlation between the bidders’ valuation. We consider risk neutral bidders who compete for the control of a target firm in which they get initial shareholdings. The bidder valuation for target firm is correlated with his motivations which determine the bidder’s strategy. We study bidder’s optimal strategy in mixed motivations setting. Since motivations are numerous, hypothesis of affiliated value in auctions allows to study bidder’s strategy. The paper shows that the impact of affiliation degree on bidder’s optimal strategy depends on their private signal and on the ratio between their initial shareholdings. Particularly, we found that if a potential bidder overbids when he gets toeholds in the target firm, the extent of overbidding is not monotonically increasing with the size of toeholds and the level of private signal. There is a threshold of private signal under which the bidder is more aggressive given the size of his toeholds and also in which the bidder is less aggressive. The target firm’s expected revenue increases with the degree of affiliation of bidder’s valuation.When potential bidders get identical size of toeholds, their bid doesn’t depend on the valuation’s affiliation degree. Their optimal offer increases both in their private signal and in toeholds. In this case, the bidder with highest signal wins and competition between bidders yields to an efficient allocation.