Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions



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    • Kellogg Graduate School of Management, Northwestern University. This is a revised version of a chapter of my Ph.D. thesis at the University of Chicago. I am grateful to Doug Diamond, Ron Giammarino, Sandy Grossman, Milt Harris, Robert Heinkel, Merton Miller, René Stulz, an anonymous referee, and an anonymous Associate Editor for helpful comments and discussions.


The medium of exchange in acquisitions is studied in a model where (i) bidders' offers bring forth potential competition and (ii) targets and bidders are asymmetrically informed. In equilibrium, both securities and cash offers are observed. Securities have the advantage of inducing target management to make an efficient accept/reject decision. Cash has the advantage of serving, in equilibrium, to “preempt” competition by signaling a high valuation for the target. Implications concerning the medium of exchange of an offer, the probability of acceptance, the probability of competing bids, expected profits, and the costs of bidders are derived.