Negotiations Under the Threat of an Auction
AFA 2009 San Francisco Meetings Paper
40 Pages Posted: 21 Feb 2008 Last revised: 15 Dec 2010
Date Written: January 14, 2009
Many takeovers occur after one-on-one negotiations, which suggests a troubling lack of competition. We seek to determine whether acquirers in such friendly deals are truly insulated from competitive pressures. We study two countervailing influences: (1) potential but unobserved latent competition, the likelihood that rival bidders could appear, and (2) anticipated auction costs when negotiations fail. Using various proxies, we find that latent competition increases the bid premium offered in negotiated deals while auction costs reduce the premium.
Keywords: Merger Negotiations, Latent Competition, Auction Costs, Bid Premium
JEL Classification: G30, G34
Suggested Citation: Suggested Citation