46 Pages Posted: 11 Apr 2014 Last revised: 12 Jan 2017
Date Written: January 11, 2017
We show that in many cases target shareholders would obtain higher prices if their company were sold via a negotiation, rather than via an auction. We show that fewer than half of invited potential bidders participate in takeover auctions. Endogenous participation is thus an important feature of takeover auction markets. Accounting for the endogenous determination of the size and composition of the bidder pool, we show that possible bidders in takeover auctions face substantial uncertainty prior to their entry into an auction, but that this uncertainty encourages participation in competitive bidding, thus making auctions preferable when uncertainty is high. In negotiations, uncertainty reduces the effectiveness of upward bid-shading to deter potential competitors, so negotiations are preferable when uncertainty is low. Cross-sectional averages thus mask dramatic variation in the best way to sell a company, but over 40 percent of this variation is accounted for by pre-entry uncertainty and the costs of overcoming it. Our results call into question claims that target directors necessarily violate their fiduciary duty by selling a company via a negotiated transaction, even in the absence of a formal market check.
Keywords: Takeover Auctions, Mergers and Acquisitions
JEL Classification: D44, G44
Suggested Citation: Suggested Citation