Another game frequently played in MBA strategy classes is the acquire a company game. The set-up of the game is as follows. Company A has only one asset, offshore oil leases. The expected profit from these leases is uniformly distributed between $0 and $100 million, so the expected value to company A is $50 million. Company B is thinking of acquiring Company A. Company B's management is more efficient than A's; specifically, the value of A's assets under B's management is 1.5 times greater. For example, the expected value of A's oil leases under B's management is 1.5 $50 million, or $75 million. Company B can submit a written bid to acquire Company A. A will review the bid, and accept or reject the offer after learning the value of the oil leases with certainty.
You are advising Company B on its potential acquisition of Company A. What is the optimal bid for Company B to submit?
A) Do not submit a bid
B) Bid $50 million
C) Bid $75 million
D) Bid $100 million

Question

Quizplus · Accepted Answer

The optimal bid is to not bid at all. Any bid accepted by Company A is always weakly greater than the value of the oil leases, because Company A knows with certainty the value of the oil leases when it reviews Company B's offer. The most common bid submitted in classroom experiments is $75 million, which is just 1.5 times Company A's expected value of the oil leases ($50 million). But Company A will only accept B's bid of $75 million when the oil leases are worth $75 million or less; it will reject B's bid of $75 million when the oil leases are worth more than $75 million.

Another Game Frequently Played in MBA Strategy Classes Is the Acquire