Financing bidders in takeover contests

The paper studies a takeover contests, in which cash-constrained bidders decide on the optimal way to …nance their cash bid. For both bidders and the seller this decision is at least as important as deciding on whether the payment should be in cash or in securities. The main result is that the optimal choice of the type of security contract (e.g., debt, equity, etc.) depends on bidders’access to a competitive market for capital. Thereby, bidders are concerned more about the type of security rather than its cost as, for any given security type, they pass-on increases in the cost of …nancing to the seller. Finally, the seller can induce all bidders to bid more aggressively by accepting security bids or by o¤ering alternative …nancing, even if bidders ultimately raise cash …nancing from outside …nanciers. Journal of Economic Literature Classi…cation Codes: D44, G32, G33, G34. Keywords: Financing auction bids, …nancially constrained bidders, takeover contests, bankruptcy auctions. University of Amsterdam, Finance Group, and Goethe University. E-mail: vladimirov@…nance.unifrankfurt.de. I want to thank seminar participants at the University of Amsterdam, Boston University, EBS, Goethe University, University of Houston, Imperial College, INSEAD, LSE, University of Vienna, and Warwick Business School as well as Ulf Axelson, Mike Burkart, Denis Gromb, Florian Ho¤mann, Roman Inderst, Andrey Malenko, Sebastian Pfeil, Paul Povel, Matthew Rhodes-Kropf and all others who took their time to provide me with helpful insights and comments on this paper.