Negotiations Under the Threat of an Auction

Abstract

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.

The Impact of Go‐Shop Provisions in Merger Agreements

“…Thus, offer premiums appear to be higher when the likelihood of a go-shop is higher, consistent with the shareholder interest hypothesis. This supports Aktas et al (2010) who suggest that the initial bidder may attempt to deter competition by offering a higher bid premium. In Model 2, we use Prop-goshop as the instrument and obtain similar results.…”

“…Including additional instruments (Auction for go-shop and Hot Market for initial premium) yields similar results as reported in Model 2. The results suggest that causality is running from go-shop inclusion to the higher initial premium, consistent with Aktas et al (2010), and not in the reverse direction.…”

A Bargaining Model of Friendly and Hostile Takeovers

“…Existing theoretical works differ from our setup in three crucial aspects. First, most of the received literature adopts an auction-based rather than a bargainingbased procedure to model a takeover process (Loyola 2012a;Dasgupta and Tsui 2003;Hansen 2001), which is surprising given that according to the evidence, at least half of takeovers are conducted under a negotiation format (Aktas et al 2010;Boone and Mulherin 2007b). Second, whereas previous analyses classify a hostile/friendly takeover only by the target management's response to a merger invitation (Betton et al 2009), our formulation considers the buyer's initial intentions regarding the continuation or elimination of management's private benefits.…”

Disclosure Regulation and Corporate Acquisitions

“…As short sellers had estimated a free float of 13% while the actual free float was 6%, the disclosure allegedly led to a "short squeeze" (i.e., a sharp increase in the stock price that forces short sellers to close out their positions, thus adding to the upward price pressure; Ringe [2016]). example, Aktas, Bodt, and Roll [2010] document that bids are higher when there are more potential competing bidders. The information released under the ownership disclosure rules signals to potential bidders that the acquirer may intend to take over the target firm.…”