Choose Wisely: Auction or Negotiation?

39 Pages Posted: 5 Mar 2015

See all articles by Inga Chira

Inga Chira

California State University- Northridge

Nikanor Volkov

Mercer University

Date Written: March 3, 2015

Abstract

We examine the method by which firms are sold, auctions or one-on-one negotiations. We define and describe a subset of transactions that result from auction failure (i.e., target-attempted auctions that secure only one bidder). Controlling for endogeneity, firm, and transaction specific characteristics, we show that failed auctions are associated with lower final premiums and higher acquirer returns compared with both successful auctions and pure negotiations (negotiations with only one bidder from the outset to the conclusion of the transaction). We find that several target, acquirer, and deal-specific characteristics affect the likelihood of auction failure. The loss of latent (perceived) competition that results from a failed auction partially shifts the wealth created by a merger or acquisition from targets’ to acquirers’ shareholders. To maximize shareholders’ wealth, targets should carefully consider the likelihood of auction failure ex ante.

Keywords: Auctions, Negotiations, Failed Auctions, Takeover Process

JEL Classification: D44, G34

Suggested Citation

Chira, Inga and Volkov, Nikanor, Choose Wisely: Auction or Negotiation? (March 3, 2015). Available at SSRN: https://ssrn.com/abstract=2573444 or http://dx.doi.org/10.2139/ssrn.2573444

Inga Chira (Contact Author)

California State University- Northridge ( email )

Nikanor Volkov

Mercer University ( email )

1400 Coleman Avenue
Atlanta, GA 30341-4155
United States

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