Horizontal mergers with synergies: Cash vs. profit-share auctions

We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target and bidders can influence rivals' beliefs through their bids. We compare cash and profit-share auctions, first- and second-price, supplemented by entry fees. Since non-merged firms benefit from a merger if synergies are low, bidders are subject to a positive externality with positive probability; nevertheless, pooling does not occur. Unlike cash auctions, profit-share auctions are not revenue equivalent, and the second-price profit-share auction is more profitable than the other auctions. •A takeover target is auctioned among firms that compete in a Cournot market.•Synergies take the form of cost reductions which are firms’ private information.•Firms observe the winning bid which may signal the winner’s synergy parameter.•The auction is either a cash- or profit-share auction, either first- or second-price.•The second-price profit-share auction is more profitable than all others.