Similar bidders in takeover contests

When bidders in a corporate takeover have related resources and post-acquisition strategies, their valuations of a target are likely to be interdependent. This paper analyzes a theoretical model and a laboratory experiment of sequential-entry takeover contests in which similar acquirers have correlated private valuations. Increased similarity between bidders has two effects on equilibrium bidding strategies. On the one hand, informational externalities of early bids from similar rivals induce participation in the contest. On the other hand, a bidding competition between similar bidders makes participation less attractive. The model predicts that expected acquisition prices and the probability of multiple-bidder contests are the highest for intermediately similar bidders. Our laboratory experiments indicate overbidding and excessive participation compared to the equilibrium. Accounting for acquirers’ additional utility of winning, the experiments support the theory. JEL codes: G34, D44, D03