How Costly to Sell a Company? A Structural Analysis of Takeover Auctions

Abstract

To explain why sellers in takeover auctions restrict bidders' entry, we quantify economic costs incurred when inviting an additional bidder. Our auction model allows bidders to discount their synergy values when other industry players gain access to confidential information about the target company. We identify the model primitives, allowing for unobserved heterogeneity, as confidential information is latent. We obtain the posterior of the primitives using a sample with 287 M\&A deals of U.S. public companies. The unobserved heterogeneity explains around 30 percent of the premium variation. We find a considerable economic cost of running a takeover auction. First, information costs are heterogeneous across industries, ranging from 2\% to 38\%. Second, operating costs are 3 to 9 times higher than the reported accounting fees. However, we do not find evidence that an alternative mechanism would generate higher premiums than the sealed-bid auction, justifying the current mechanism.

Keywords: Mergers and Acquisitions, Takeover Auctions, Structural Identification and Estimation, Information Cost, Operation Cost

JEL Classification: C57, D22, D44, G34