Asset complementarity and optimality of one-to-one negotiations when selling firms
31 Pages Posted: 29 May 2016 Last revised: 23 Jun 2021
Date Written: March 3, 2020
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: Suggested Citation