Participation Costs and Inefficiency in Takeover Contests

We consider a takeover in which risk neutral bidders incur private costs when they participate in the auction. Supposing that valuations for a target firm are common knowledge, we study the optimal strategy of bidders and analyze the takeover result when they get or do not get toeholds in the target firm. We find that bidders' decision of participation is endogenous. By analyzing bidders' condition of participation, we find that there is a probability that the potential bidder with the highest valuation does not participate in the control. We show that this probability increases with the size of toeholds possessed by the bidder with a low valuation. Nevertheless, a larger size of toeholds possessed by the bidder with the highest valuation increases the probability of his participation in the auction. Asymmetric toeholds between potential bidders can accentuate inefficient allocation when participation costs are private information. However, if the bidder with toeholds deters completely bidders without toeholds in private valuation setting (Ettinger 2009 [Ettinger D (2009) Takeover contests, toeholds and deterrence. Scandinavian J. Econom. 111(1):103-124.1), the results of the current papers show that the phenomenon of fully deterring is destroyed when valuations are common knowledge.