THE STRATEGIC ROLE OF DEBT IN TAKEOVER CONTESTS

In a takeover contest, the presence of bidders' existing debtholders, if they can be expropriated by issuing new debt with equal or senior p riority, allows bidders to commit to bid more than their valuation of the target. Such commitment can be beneficial because it deters potent ial entry by subsequent bidders and may allow a first bidder to acquir e the target at a bargain price. The cost is that if entry by subseque nt bidders does nevertheless take place, because the first bidder has committed himself to bid high premia, a bidding war ensues resulting i n offers that may involve excessive premia, i.e., bids that are larger than the bidders' valuation of the target.