Bidder Pools in Mergers and Acquisitions

Allocation mechanisms in M&A deals are complex, but a main feature is that a target board controls who to invite to the sale. In a theoretical model, we show that it is optimal for the target to invite fewer potential acquirers when they are more homogeneous (i.e., when their values for the target are more correlated). Furthermore, greater correlation (and hence a smaller optimal bidder pool) yields the target a higher surplus from the sale (i.e., higher premium). We test the model empirically and show that M&A deals with smaller bidder pools are associated with higher target returns. This is not a result of synergies in the deals: the target's share of the surplus is simply higher in deals with smaller bidder pools. Finally, we show that cash deals are associated with larger, whereas stock deals have smaller, pools of bidders.