Similar bidders in takeover contests

- We model a sequential-entry takeover contest in which similar bidders have correlated private valuations.
- On the one hand, higher levels of similarity increase informativeness of early bids which induces entry of followers.
- On the other hand, higher similarity also intensifies post-entry bidding competition which discourages potential entrants.
- As a consequence, expected acquisition prices and the probability of multiple-bidder contests are the highest for intermediately similar bidders.
- Laboratory experiments confirm the modelʼs predictions.

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 sequential-entry takeover contests in which similar bidders have correlated private valuations. The level of similarity affects information content of bids and bidding competition. Our model predicts that expected acquisition prices and the probability of multiple-bidder contests are the highest for intermediately similar bidders. We test these predictions in laboratory experiments in which we control the similarity between bidders. The experimental data confirm the non-monotonic effects of similarity on prices and on the frequency of multiple-bidder contents.