This paper uses a unified treatment of real options and game theory to examine value appropriation in takeovers within a competitive environment of imperfect information. The integrated model considers a potential target as a shared real option on a bundle of resources. Competing potential buyers may sequentially perform due diligence and incur costs (option premium) to become informed about their firm-specific target value (underlying value) before making a bid (exercise price). The first player’s bid provides a signal on its own and rivals’ target value, thereby affecting potential bidders’ option value. The level of information costs and the option value, affected by heterogeneity between bidders (correlation), their expected target value, and uncertainty, determine value appropriation in acquisitions.

acquisitions, competitive bidding, option game, real options, resources
Criteria for Decision-Making under Risk and Uncertainty (jel D81), Asymmetric and Private Information (jel D82), Corporate Finance and Governance: General (jel G30), Mergers; Acquisitions; Restructuring; Corporate Governance (jel G34)
Tinbergen Institute Discussion Paper Series
Tinbergen Institute

Smit, J.T.J, van den Berg, W.A, & de Maeseneire, W. (2005). Acquisitions as a Real Options Bidding Game (No. TI 04-084/2). Tinbergen Institute Discussion Paper Series. Retrieved from