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Most gains in takeovers accrue to targets, suggesting the presence of strong competition among acquirers. Yet recent literature documents a seemingly contradictory fact; a large majority of all takeovers occur after one-on-one negotiations. We seek to determine whether the acquirers in such friendly deals are totally insulated from competitive pressures. Realizing that the mere possibility of an open auction might threaten negotiations, we emphasize the role of ex ante competition, the likelihood that rival bidders will appear. Using several proxies, we find that ex ante competition increases the bid premium for directly-negotiated deals. We show also that auction costs reduce the bid premium required by targets in negotiations.

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