Entry and competition in takeover auctions

Abstract

We estimate the degree of uncertainty faced by potential bidders in takeover auctions and quantify how it affects prices in auctions and negotiations. The high degree of uncertainty revealed by our structural estimation encourages entry in auctions but reduces a target's bargaining power in negotiations. In the aggregate, auctions and negotiations produce similar prices, even though auctions are preferred in takeover markets with high uncertainty, while the reverse is true for negotiations. Firm characteristics predict pre-entry uncertainty and thus are informative about the relative performance of auctions and negotiations for individual targets.

Ex Ante Efficient Mechanism With Private Entry Costs

“…For the Texas Department of Transportation mowing contract auctions, Li and Zheng () report that only about 28% of plan‐holders actually submit bids. Similar endogenous entry patterns have been reported by Bajari and Hortacsu () for online auctions, by Athey, Levin, and Seira (), Li and Zhang (, ), and Roberts and Sweeting () for timber auctions, by Krasnokutskaya and Seim () for highway procurement and by Gentry and Stroup () for corporate takeover markets among many others…”

Costly auction entry, royalty payments, and the optimality of asymmetric designs

“…Intuitively, when entry is costless, it is optimal to always award the asset (i.e.,θ opt ϕ=0 = θ > 0; and as α → 1, the optimal mechanism leaves no rents to bidders, so seller revenue equals the social welfare gain created by the asset's allocation. By (12) again, comparing this costless-entry benchmark and our costly-entry setting where ϕ > 0 yields…”

“…nism that induces entry cutoffs (θ opt 1 ,θ opt 2 ) withθ opt 1 <θ opt 2 can be implemented by a secondprice auction with reserve price r i = (1 − α)θ opt i for bidder i ∈ {1, 2} and entry subsidy ϕ to any entrant i whose bid exceeds r i , where the auction winner i makes the additional royalty payment αZ i with α ∈ [0, 1). 12 These reserve prices and subsidy reflect that after entering the auction, entry costs are sunk, it is a weakly dominant strategy for a bidder with valuation θ to bid (1 − α)θ in the second-price auction with royalty rate α, and each entrant is reimbursed with its entry cost to address individual rationality.…”

“…Optimal entry cutoffsθ 1 andθ 2 as a function of ϕ and α when bidder valuations are independently uniformly distributed on[9,12] and ϕ < 1.5 so A1 holds.…”

Relinquishing Riches: Auctions vs Informal Negotiations in Texas Oil and Gas Leasing

“…These results contribute to a small empirical literature which compares the performance of auctions to alternative mechanisms in real world settings. Roberts and Sweeting (2013) find that a sequential mechanism performs better than a simultaneous bid auction in timber sales, and Gentry and Stroup (2018) find that the two mechanisms perform similarly in corporate takeovers. 2 Salz (2017) estimates large returns from the use of intermediaries, who organize auctions on their client's behalf, in the highly decentralized market for waste collection in New York City.…”