Optimal Acquisition Strategies in Unknown Territories

This paper investigates the optimal acquisition strategy of a foreign investor, who wants to acquire one out of two local firms, under incomplete information. The response to acquisition offers is also a signal on firm productivity, affecting future competition. We identify a competition effect (firms compete for acquisition) and a revelation effect (firms reveal their productivities). These effects reduce the rejection profits and increase the acceptance probability. If the investor makes simultaneous offers, the revelation effect is a potential threat because a firm may signal low productivity, but may not be acquired. If, however, the investor makes offers sequentially, this threat does not exist, making sequential offers the optimal acquisition strategy.