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.