Preemptive bidding, target resistance, and takeover premiums

This paper empirically evaluates two possible sources of large takeover premiums: preemptive bidding and target resistance. We develop an auction model that features costly sequential entry of bidders in takeover contests and that encompasses both explanations. We estimate the model parameters using simulated method of moments for a sample of US target firms in the period 1988-2006. We find that target resistance is the main determinant of takeover premiums in 74% of successful single bidder-contests. Simulation experiments also show that, on average, bidders' costs of entry are 2.8% of the target's preacquisition market capitalization, and the initial bidders' valuation for the target company is 17% higher than the valuation of their rivals. Merger, auctions, target resistance, preemptive bidding, structural estimation