Asset complementarity and optimality of one-to-one negotiations when selling firms

31 Pages Posted: 29 May 2016 Last revised: 23 Jun 2021

See all articles by Jana P. Fidrmuc

Jana P. Fidrmuc

Warwick Business School - Finance Group

Kostas Koufopoulos

University of York

Chunling Xia

Queen Mary University of London

Date Written: March 3, 2020

Abstract

This paper explores the question of the optimality of negotiations with one invited bidder from the seller's point of view. We develop a simple model where synergies created in deals depend on the complementarity of assets between targets and bidders and differ across different bidders. The model shows that the target manager may optimally choose to invite only one bidder into sale negotiations. The key feature of the model is that the target manager is able to divide potential bidders into groups according to their asset complementarity with the target firm and rank these groups by the value their members can create if combined with the target. The target manager is not able to distinguish among bidders within each group. Given small information disclosure cost per bidder paid by the target firm, it is optimal for the target manager to invite into auction only the group of bidders with the highest complementarity of assets. Empirical tests confirm two model predictions linking the ability of the target manager to differentiate among potential bidders according to asset complementarities with the target and (i) the number of bidders invited into the selling auction and (ii) the winning bidder's bargaining power.

Keywords: Mergers and acquisitions; selling process; asset complementarity; optimality; auctions

JEL Classification: G34, G14

Suggested Citation

Fidrmuc, Jana P. and Koufopoulos, Kostas and Xia, Chunling, Asset complementarity and optimality of one-to-one negotiations when selling firms (March 3, 2020). Available at SSRN: https://ssrn.com/abstract=2784814 or http://dx.doi.org/10.2139/ssrn.2784814

Jana P. Fidrmuc (Contact Author)

Warwick Business School - Finance Group ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

Kostas Koufopoulos

University of York ( email )

Heslington
York, YO1 5DD
United Kingdom

Chunling Xia

Queen Mary University of London ( email )

School of Business and Management
Mile End Road
London, E1 4NS
United Kingdom

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