The role of lockups in takeover contests
Yeon-Koo Che; Tracy R. Lewis
- The role of lockups in takeover contests
Lewis, Tracy R.
- Working papers
- Permanent URL:
- Department of Economics Discussion Papers
- Part Number:
- Department of Economics, Columbia University
- Publisher Location:
- New York
- This paper examines breakup fees and stock lockups as devices for prospective target firms to encourage bidder participation in takeover contest. We show that, unless bidding costs for the first bidder are too high, breakup fees provide for the socially desirable degree of competition and ensure the efficient allocation of the target to the highest valued buyer in a takeover auction. In contrast, stock lockups permit the target firm to subsidize entry of a new bidder at the expense of an incumbent bidder. Stock lockups induce too much competition when offered to a second bidder and too little competition when offered to a first bidder. Despite their socially wasteful properties, target management would favor stock lockups as they induce takeover competition at least cost to the target.
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