In mergers and acquisitions, a bidding war takes place when two or more potential acquirers both submit offers to purchase the same target firm. These bids may be hostile or friendly and may come at any time. Often once an offer has been made for a target firm, a go-shop period is initiated. This is where the target firm is allowed to solicit alternative bids from other potential suitors and is a fulfillment of the fiduciary duty of the board of directors to maximize shareholder value and obtain the best deal. The go-shop period usually lasts 35 days.
If another bidder emerges during this time, or at any other time, if unsolicited, the rival may submit a superior offer to the target. This is the start of a bidding war. Ultimately, bidding wars are seen as a huge bonus for merger arbitrageurs as the potential profit can be many times that what was originally expected. On the other hand, the cost to the eventual winner will be more expensive than forecast and can significantly erode the profitability of the deal.
In “Winning by Losing: Evidence on Overbidding in Mergers“, Malmendier, Moretti & Peters offer the following observations
A Bidding War Example
In “What determines the success of bidding firms in M&A deals?” Pan gives the following example of a bidding war with some additional analysis
Below, we provide an example of a bidding war to illustrate our definition of “success”. In 2006, Boston Scientific and Johnson & Johnson bid for Guidant, and finally Boston won the takeover battle and subsequently acquired Guidant. Competitive contests such as these happen frequently in the real business world. To illustrate, Betton et al. (2008) report that the initial bidder wins the bid in only two-thirds of ten thousand initial control bids for US public targets between 1980 and 2005, though the sample is only limited to the initial bidders. Moreover, when a rival bidder appears, the rival wins the bid twice as often as the initial bidder.
A more recent example of a bidding war can be seen in Anixter International (AXE), which has seen multiple bids move the price substantially higher from the original offer. The LVMH takeover of Tiffany (TIF) is not a bidding war despite a superior offer being made as this was all done by LVMH.
