This paper argues that endogenizing how acquirers finance their cash bids is just as important for understanding bidding in takeovers as endogenizing acquirers׳ payment method choice. The paper shows that acquirers finance their cash bids with equity only if they lack access to competitive financing. This leads to underbidding and lower takeover premiums. Conversely, acquirers with access to competitive financing use debt and overbid. Endogenizing the payment method reveals that security (e.g., stock) bids carry lower premiums than cash bids, backed by competitive financing. These insights find empirical support and could help explain existing evidence, which contradicts prior theory.

We investigate a seller's strategic choice between optimally structured negotiations with fewer bidders and an auction with more competing bidders when payments can have a contingent component, as is common in mergers and acquisitions (M&A), patent licensing, and employee compensation. The key factor favoring negotiations is that it allows the seller to set her preferred payment structure—that is, the revenue‐maximizing mix of cash and contingent pay; reserve prices are of secondary importance. Negotiations are more likely to dominate if synergies increase in bidders' productivity types (as with acquirer‐target complementarities in M&A). Higher dispersion and magnitude of bidders' private valuations also favor negotiations.