Optimal Auction Processes for Sellers in Large Multi-Billion Dollar M&A Deals with Private Equity Buyers

Abstract

This paper considers some potentially optimal and new hybrid auction processes, that could be easily implemented to help boost and maximize cash proceeds for Sellers (potentially earning them huge additional amounts that might otherwise be lost) for the special case of large, multi-billion-dollar M&A deals, particularly with private equity buyers.

The proposed approach is based on combining some technical insights from microeconomics, economic game theory for auction mechanism design, and algorithm design, together with the legal practicalities and particular market parameters for this specific and globally significant class of high value transaction.

The proposed mechanisms would also incorporate various additional measures to help maximize auction bidder competition and minimize any potential bidder collusion or coordination. The likely optimality, quasi-optimality and sub-optimality of alternative auction mechanisms and how this could be tested experimentally is also considered.

All these results can of course also be extended to other smaller scale M&A auctions, and other buyer types, mutatis mutandis.

Keywords: Legal economics, private equity, auction, mechanism design, optimization, algorithm, opportunity cost, SPA, Sale & Purchase Agreement, bid-rigging, collusion, deal allocation, market sharing, non-compete agreement, transfer pricing, arm’s length pricing, monopoly, imperfect competition

JEL Classification: K21, D44, D43, K11