Takeover Contests with Asymmetric Bidders

Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature poorly-performing companies. We also find that (i) valuations of different strategic bidders are more dispersed, (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.Keywords: mergers and acquisitions, strategic bidders, financial bidders, takeover auctions JEL Classification Numbers: D44, G32, G34 * Gorbenko is with London Business School. Malenko is with MIT Sloan School of Management. We are grateful to two anonymous referees, the anonymous Associate Editor, Jules van Binsbergen, Jonathan Cohn, Peter DeMarzo, Darrell Duffie, Campbell Harvey (the Editor), Han Hong, Dirk Jenter, Ron Kaniel, Arthur Korteweg, Ilan Kremer, John Lazarev, Nadya Malenko, Ian Martin, Gregor Matvos (WashU discussant), Michael Ostrovsky, Francisco Perez-Gonzalez, Matthew Rhodes-Kropf (WFA discussant), Ilya Strebulaev, Jessica Yang, Jeffrey Zwiebel, seminar participants at Boston University, Higher School of Economics, London Business School, London School of Economics, Norwegian School of Economics, University of Connecticut, University of Rochester, University of Utah, and participants at the 2010 Western Finance Association Meeting in Victoria and the 8th Annual Corporate Finance Conference at Washington University in St. Louis for helpful comments. 1Electronic copy available at: http://ssrn.com/abstract=1559481The market for corporate control is one of the largest corporate markets. In 2007 alone, the value of M&A transactions worldwide was a staggering $4.8 trillion. While some takeovers proceed as negotiations of a target with a single acquirer, many takeovers face competition among several bidders.1 The set of bidders is comprised of two groups: strategic and financial.Strategic bidders are usually companies in a related type of business, such as competitors, suppliers, or customers. They tend to look for targets that offer long-term operational synergies and integrate them into their own business. In contrast, financial bidders, typically private equity firms, look for undervalued targets with a potential to generate high cash flow, often after a reorganization. After the acquisition, a financial bidder treats the target as a part of its financial portfolio and sells it once exit opportunities become sufficiently appealing.Despite their recognized importance, 2 the differences between strategic and financial bidders remain largely unexplored. A common view is that strategic bidders are systematically willing to pay more than financial bidders. For example, as Mark E. Thompson and Michael J. O'Brien, practitioners in the privat...

Section: B Our Model Of Takeover Auctions Versus Linear Regression Omentioning

confidence: 99%

Strategic and Financial Bidders in Takeover Auctions

Gorbenko

Malenko

2010

“…8 The last result is in line with the established superiority of sequential mechanisms which give priority to stronger bidders. Povel and Singh (2006), for instance, analyze takeover contests under a general value setting that allows both private and common value environments. They characterize the optimal selling procedure that a target company should design when it faces two outside bidders (without toeholds) who are asymmetrically informed.…”

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confidence: 99%

“…An important di¤erence between the last two papers and ours, apart from the valuation environment adopted, lies in the mechanism itself, which implies bidders'participation strategies of di¤erent nature. Povel and Singh (2006) propose a hybrid sequential procedure that combines standard auctions and exclusive deals. Similarly, in the auction-based mechanism studied by Dasgupta and Tsui (2003), the …rst mover bidder actively follows a bid strategy, whereas the second one only decides whether or not match this bid.…”

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confidence: 99%

Optimal Takeover Contests with Toeholds

Loyola

2009

This paper characterizes how a target firm should be sold when the possible buyers (bidders) have prior stakes in its ownership (toeholds). We find that the optimal mechanism needs to be implemented by a non-standard auction which imposes a bias against bidders with high toeholds. This discriminatory procedure is such that the target´s average sale price is increasing in both the size of the common toehold and the degree of asymmetry in these stakes. It is also shown that a simple mechanism of sequential negotiation replicates the main properties of the optimal procedure and yields a higher average selling price than the standard auctions commonly used in takeover battles.

“…We interpret this as support for our view that even when bidding takes place, potential acquirers anticipate that a merger agreement with the winning bidder may be subject to renegotiations. In principle, this equally applies when the target management is bypassed through shareholder agreements or tender offers, because renegotiation will also be in the interest of the target shareholder, unless she cares about the outcome of future deals (Povel and Singh 2006). Correspondingly, Comment and Jarrell (1987) report that four-fifths of all successful cash tender offers are (re)negotiated between bidders and target managers before expiration.…”

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confidence: 99%

“…Povel and Singh (2004) and Povel and Singh (2006) propose a sequential auction as optimal selling mechanism to asymmetric bidders, where a target first offers an exclusive deal to the best informed bidder. Once a target has determined such an optimal auction mechanism, the announcement of termination fees for the winning bidder may signal the target's committment to the proposed selling procedure.…”

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confidence: 99%

Bargaining in Mergers and Termination Fees

Rosenkranz

Weitzel

2007

We model takeovers as a bargaining process and explain termination fees for, both, the target and the acquirer, subject to parties' bargaining power and outside options. In equilibrium, termination fees are offered by firms with outside options in exchange for a greater share of merger synergies. Termination fees decrease in firms' bargaining power, and increase in firms' outside options. We find that a merger with the second highest bidder, including a termination fee, can lead to equally high premiums as a merger with the highest bidder, without a termination fee. This novel result directly contrasts the agency cost perspective, which argues that termination provisions may be used by managers to lock into acquirers that do not generate the highest shareholder value. Further, even in a merger with the highest bidder and in the absence of bidding related costs, a termination fee is not necessarily a deal protection device, but can be used to improve shareholder value. Our bargaining model offers an alternative to auction related explanations of termination fees, like cost compensation or seller commitment.