How should a startup respond to acquirers? A real options analysis

Many startups have recently opted for sellout to large firms with great market power and profit margins. This paper attempts to understand and guide such startup sellout decisions by developing a model in which the firm reacts to random approaches of high- and low-type acquirers. Optimally, the startup takes either a high-price strategy?accepting only a high-type acquirer in a good economic state? or a flexible strategy?accepting a high-type acquirer in an intermediate economic state and either type in a good economic state? based on a tradeoff between sellout pricing and timing efficiency. With asymmetric information, where the acquirer types are unobservable, the startup accepts a high-price acquisition more eagerly and a low-price acquisition more restrictively to reduce the acquirer fs information rent. Then, asymmetric information increases the probability of a high-price sellout and delays the sellout. A model analysis shows that the market parameters as well as anticipation of acquirers (i.e., the acquirers f arrival rate, valuation, and transparency) greatly affect the sellout price, sellout timing, firm value, and stock price reaction.