Financing bidders in takeover contests

The paper studies a takeover contests, in which cash-constrained bidders decide on the optimal way to finance their cash bid. For both bidders and the seller this decision is at least as important as deciding on whether the payment should be in cash or in securities. The main result is that the optimal choice of the type of security contract (e.g., debt, equity, etc.) depends on bidders’access to a competitive market for capital. Thereby, bidders are concerned more about the type of security
rather than its cost as, for any given security type, they pass-on increases in the cost of financing to the seller. Finally, the seller can induce all bidders to bid more aggressively by accepting security bids or by offering alternative financing, even if bidders ultimately raise cash financing from outside financiers.