Start-ups, incumbents, and the effects of takeover competition

• Published in: Journal of business research Vol. 69; no. 12; pp. 5925 - 5933
• Main Authors: Becker, Jan U., Clement, Michel, Nöth, Markus
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.12.2016; Elsevier Sequoia S.A
• Subjects: Acquisitions & mergers; Applied decision analysis; Bidding behavior; Bids; Competitive strategy; Experiments; Revenue; Social networks; Stakeholders; Startups; Studies; Uncertainty; Bidding behavior; Competitive strategy; Applied decision analysis; Experiments
• ISSN: 0148-2963; 1873-7978
• DOI: 10.1016/j.jbusres.2016.05.005

Recent acquisitions involving Tumblr and Instagram have demonstrated that the takeover of an unlisted start-up company can offer enormous financial benefits to its (former) stakeholders. Considering the multimillion-dollar amounts paid for start-ups with no existing and highly uncertain future revenues, we investigate the process and outcome of negotiation dynamics in the context of takeovers. In a series of experiments, we show that even with a low level of uncertainty about a start-up's value and its financial resources, start-ups can influence bidders' behavior and consequently the start-ups' valuation. The results indicate that incumbents' bidding behavior is driven by the perceived threat level with respect to the start-up's business activities as well as by the uncertainty with respect to other incumbents' bidding behavior—drivers that are subject to activities by the start-ups' management. Interestingly, the effect even exists if incumbents clearly know that initiating a bidding process will very likely lead to losses.