1932
0
  1. Home
  2. A-Z Publications
  3. Annual Review of Financial Economics
  4. Volume 12, 2020
  5. Article

Annual Review of Financial Economics

Volume 12, 2020

Strategic Decisions in Takeover Auctions: Recent Developments

Abstract

We review recent research into how firms navigate four complex decisions in corporate takeovers: () deal initiation, () pre-offer toehold acquisition, () the initial (public) offer price, and () the payment method. We focus the evidence on public targets and the theory on first-price or English (ascending-price) auctions with two competing bidders and a single (pivotal) seller. The evidence shows that nearly half of bids are initiated by the target (not a bidder). Notwithstanding the large offer premiums, only a small fraction of bidders acquire a target toehold prior to bidding. The first bid rarely attracts rival bidders, suggesting effective competition deterrence. Bid jumps are high, as predicted when bidding costs are large. Pre-bid stock price run-ups reflect rational market deal anticipation and are understood as such by the deal negotiators. Bidders select stock payment when concerned with adverse selection on the target side of the deal.

Keyword(s): auction, bidder opportunism, competition preemption, JEL G34, negotiation, optimal bidding, payment method, takeover initiation
Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-012720-013903
2020-11-01
2024-04-20
Loading full text...

Full text loading...

/deliver/fulltext/financial/12/1/annurev-financial-012720-013903.html?itemId=/content/journals/10.1146/annurev-financial-012720-013903&mimeType=html&fmt=ahah

Literature Cited

  1. Akerlof GA. 1970. The market for “lemons”: quality uncertainty and the market mechanism. Q. J. Econ. 84:488–500
     [Google Scholar]
  2. Aktas N, de Bodt E, Roll R 2010. Negotiations under the threat of an auction. J. Financ. Econ. 98:241–55
     [Google Scholar]
  3. Aktas N, de Bodt E, Roll R 2013. Learning from repetitive acquisitions: evidence from the time between deals. J. Financ. Econ. 108:99–117
     [Google Scholar]
  4. Avery C. 1998. Strategic jump bidding in English auctions. Rev. Econ. Stud. 65:185–210
     [Google Scholar]
  5. Bates TH, Lemmon ML. 2003. Breaking up is hard to do? An analysis of termination fee provisions and merger outcomes. J. Financ. Econ. 69:460–504
     [Google Scholar]
  6. Berkovitch E, Narayanan MP. 1990. Competition and the medium of exchange in takeovers. Rev. Financ. Stud. 3:153–74
     [Google Scholar]
  7. Betton S, Eckbo BE. 2000. Toeholds, bid jumps, and expected payoff in takeovers. Rev. Financ. Stud. 13:841–82
     [Google Scholar]
  8. Betton S, Eckbo BE, Thompson R, Thorburn KS 2014. Merger negotiations with stock market feedback. J. Finance 69:1705–45
     [Google Scholar]
  9. Betton S, Eckbo BE, Thorburn KS 2008. Corporate takeovers. Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 2 BE Eckbo 291–430 Handb. Finance Ser Amsterdam: Elsevier/North-Holland
     [Google Scholar]
  10. Betton S, Eckbo BE, Thorburn KS 2009. Merger negotiations and the toehold puzzle. J. Financ. Econ. 91:158–78
     [Google Scholar]
  11. Board S. 2007. Bidding into the red: a model of post-auction bankruptcy. J. Finance 62:2695–723
     [Google Scholar]
  12. Boone AL, Mulherin JH. 2007a. Do termination provisions truncate the takeover bidding process. Rev. Financ. Stud. 20:461–89
     [Google Scholar]
  13. Boone AL, Mulherin JH. 2007b. How are firms sold. J. Finance 62:847–75
     [Google Scholar]
  14. Bradley M, Desai A, Kim EH 1983. The rationale behind inter-firm tender offers: Information or synergy. J. Financ. Econ. 11:141–53
     [Google Scholar]
  15. Brav A, Jiang W, Kim H 2014. Hedge fund activism: a review. Found. Trends Finance 4:185–246
     [Google Scholar]
  16. Bruner RF. 2004. Applied Mergers and Acquisitions New York: John Wiley & Sons
  17. Bulow J, Huang M, Klemperer P 1999. Toeholds and takeovers. J. Political Econ. 107:427–54
     [Google Scholar]
  18. Bulow J, Klemperer P. 1996. Auction versus negotiations. Am. Econ. Rev. 86:180–94
     [Google Scholar]
  19. Bulow J, Klemperer P. 2009. Why do sellers (usually) prefer auctions. Am. Econ. Rev. 99:1544–75
     [Google Scholar]
  20. Burch T. 2001. Locking out rival bidders: the use of lockup options in corporate mergers. J. Financ. Econ. 60:103–41
     [Google Scholar]
  21. Burkart M. 1995. Initial shareholdings and overbidding in takeover contests. J. Finance 50:1491–515
     [Google Scholar]
  22. Burkart M, Lee S. 2008. One share–one vote: the theory. Rev. Finance 12:1–49
     [Google Scholar]
  23. Burkart M, Panunzi F. 2008. Takeovers. Handbook of European Financial Markets and Institutions X Freixas, P Hartmann, C Mayer 265–97 Oxford, UK: Oxford Univ. Press
     [Google Scholar]
  24. Corum AA, Levit D. 2019. Corporate control activism. J. Financ. Econ. 133:1–17
     [Google Scholar]
  25. Crawford VP, Sobel J. 1982. Strategic information transmission. Econometrica 50:1431–51
     [Google Scholar]
  26. Daniel KD, Hirshleifer D. 2018. A theory of costly sequential bidding. Rev. Finance 22:1631–65
     [Google Scholar]
  27. Dasgupta S, Hansen RG. 2007. Auctions in corporate finance. Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 1 BE Eckbo 87–143 Handb. Finance Ser Amsterdam: Elsevier/North-Holland
     [Google Scholar]
  28. DeMarzo PM, Kremer I, Skrzypacz A 2005. Bidding with securities: auctions and security design. Am. Econ. Rev. 95:936–59
     [Google Scholar]
  29. Dessaint O, Eckbo BE, Golubov A 2020. Bidder-specific synergies and the evolution of acquirer returns. Work. Pap., Tuck Sch. Bus., Dartmouth Coll. Hanover, NH:
     [Google Scholar]
  30. Dimopoulos T, Saccheto S. 2014. Preemptive bidding, target resistance, and takeover premiums. J. Financ. Econ. 114:444–70
     [Google Scholar]
  31. Doidge C, Karolyi GA, Stulz RM 2017. The US listing gap. J. Financ. Econ. 123:464–87
     [Google Scholar]
  32. Dong M, Hirshleifer D, Richardson S, Teoh SH 2006. Does investor misvaluation drive the takeover market. J. Finance 61:725–62
     [Google Scholar]
  33. Eaton G, Liu T, Officer MS 2019. Rethinking measures of mergers and acquisitions deal premiums. J. Financ. Quant. Anal. https://doi.org/10.1017/S0022109019001091
    [Crossref] [Google Scholar]
  34. Eckbo BE. 2009. Bidding strategies and takeover premiums: a review. J. Corp. Finance 15:149–78
     [Google Scholar]
  35. Eckbo BE. 2014. Corporate takeovers and economic efficiency. Annu. Rev. Financ. Econ. 6:51–74
     [Google Scholar]
  36. Eckbo BE, Giammarino RM, Heinkel RL 1990. Asymmetric information and the medium of exchange in takeovers: theory and tests. Rev. Financ. Stud. 3:651–75
     [Google Scholar]
  37. Eckbo BE, Lithell M 2020. The merger-adjusted US listing gap Work. Pap., Tuck Sch. Bus., Dartmouth Coll. Hanover, NH:
  38. Eckbo BE, Makaew T, Thorburn KS 2018. Are stock-financed takeovers opportunistic. J. Financ. Econ. 128:443–65
     [Google Scholar]
  39. Eckbo BE, Malenko A, Thorburn KS 2020. Corporate takeover contests Work. Pap., Dartmouth Coll Hanover, NH:
  40. Eckbo BE, Norli O, Thorburn KS 2020. Who initiates takeovers? Work. Pap., Dartmouth Coll Hanover, NH:
  41. Eckbo BE, Thorburn KS. 2009. Creditor financing and overbidding in bankruptcy auctions: theory and tests. J. Corp. Finance 15:10–29
     [Google Scholar]
  42. Faccio M, Masulis RW. 2005. The choice of payment method in European mergers and acquisitions. J. Finance 60:1345–88
     [Google Scholar]
  43. Fishman MJ. 1988. A theory of preemptive takeover bidding. RAND J. Econ. 19:88–101
     [Google Scholar]
  44. Fishman MJ. 1989. Preemptive bidding and the role of the medium of exchange in acquisitions. J. Finance 44:41–57
     [Google Scholar]
  45. Fu F, Lin L, Officer MS 2013. Acquisitions driven by stock overvaluation: Are they good deals. J. Financ. Econ. 109:24–39
     [Google Scholar]
  46. Gentry M, Stroup C. 2019. Entry and competition in takeover auctions. J. Financ. Econ. 132:298–324
     [Google Scholar]
  47. Goldman E, Qian J. 2005. Optimal toeholds in takeover contests. J. Financ. Econ. 77:321–46
     [Google Scholar]
  48. Gorbenko AS. 2019. How do valuations impact outcomes of asset sales with heterogeneous bidders. J. Financ. Econ. 131:88–117
     [Google Scholar]
  49. Gorbenko AS, Malenko A. 2014. Strategic and financial bidders in takeover auctions. J. Finance 69:2513–55
     [Google Scholar]
  50. Gorbenko AS, Malenko A. 2018. The timing and method of payment in mergers when acquirers are financially constrained. Rev. Financ. Stud. 31:3937–77
     [Google Scholar]
  51. Gorbenko AS, Malenko A. 2020. Auction with endogenous initiation Work. Pap., Univ. Michigan Ann Arbor, MI:
  52. Hansen RG. 1985. Auctions with contingent payments. Am. Econ. Rev. 75:862–65
     [Google Scholar]
  53. Hansen RG. 1987. A theory for the choice of exchange medium in the market for corporate control. J. Bus. 60:75–95
     [Google Scholar]
  54. Hansen RS. 2001. Do investment banks compete in IPOs? The advent for the 7% plus contract. J. Financ. Econ. 59:313–46
     [Google Scholar]
  55. Harford J. 2005. What drives merger waves. J. Financ. Econ. 77:529–60
     [Google Scholar]
  56. Harford J, Klasa S, Walcott N 2009. Do firms have leverage targets? Evidence from acquisitions. J. Financ. Econ. 93:1–14
     [Google Scholar]
  57. Hirshleifer D. 1995. Mergers and acquisitions: strategic and informational issues. Finance RA Jarrow, V Maksimovic, WT Ziemba 839–85 Handb. Oper. Res. Manag. Sci. Ser Amsterdam: North-Holland
     [Google Scholar]
  58. Horner J, Sahuguet N. 2007. Costly signalling in auctions. Rev. Econ. Stud. 74:173–206
     [Google Scholar]
  59. Hotchkiss ES, John K, Mooradian R, Thorburn KS 2008. Bankruptcy and the resolution of financial distress. Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 2 BE Eckbo 235–89 Handb. Finance Ser Amsterdam: Elsevier/North-Holland
     [Google Scholar]
  60. Hotchkiss ES, Mooradian RM. 2003. Auctions in bankruptcy. J. Corp. Finance 9:555–74
     [Google Scholar]
  61. Jennings RH, Mazzeo MA. 1993. Competing bids, target management resistance, and the structure of takeover bids. Rev. Financ. Stud. 6:883–910
     [Google Scholar]
  62. Jensen M, Ruback R. 1983. The market for corporate control: the scientific evidence. J. Financ. Econ. 11:1–4, April5–50
     [Google Scholar]
  63. Karampatsas N, Petmezas D, Travlos NG 2014. Credit ratings and the choice of payment method in mergers and acquisitions. J. Corp. Finance 25:474–93
     [Google Scholar]
  64. Krishna V. 2010. Auction Theory Burlington, MA: Elsevier
  65. Li D, Taylor LA, Wang W 2018. Inefficiencies and externalities from opportunistic acquirers. J. Financ. Econ. 130:265–90
     [Google Scholar]
  66. Li K, Liu T, Wu J 2018. Vote avoidance and shareholder voting in mergers and acquisitions. Rev. Financ. Stud. 31:3176–211
     [Google Scholar]
  67. Liu T. 2012. Takeover bidding with signaling incentives. Rev. Financ. Stud. 25:522–56
     [Google Scholar]
  68. Liu T, Officer MS. 2019. Inside the “black box” of private merger negotiations Work. Pap., Iowa State Univ Ames, IA:
  69. Manne HG. 1965. Mergers and the market for corporate control. J. Political Econ. 73:110–20
     [Google Scholar]
  70. Masulis RW, Simsir SA. 2018. Deal initiation in mergers and acquisitions. J. Financ. Quant. Anal. 53:2389–430
     [Google Scholar]
  71. Morellec E, Zhdanov A. 2008. Financing and takeovers. J. Financ. Econ. 87:556–81
     [Google Scholar]
  72. Officer MS. 2003. Termination fees in mergers and acquisitions. J. Financ. Econ. 69:431–67
     [Google Scholar]
  73. Povel P, Singh R. 2010. Stapled finance. J. Finance 65:927–53
     [Google Scholar]
  74. Quint D, Hendricks K. 2018. A theory of indicative bidding. Am. Econ. J. Microecon. 10:118–51
     [Google Scholar]
  75. Rhodes-Kropf M, Robinson DT, Viswanathan S 2005. Valuation waves and merger activity: the empirical evidence. J. Financ. Econ. 77:561–603
     [Google Scholar]
  76. Rhodes-Kropf M, Viswanathan S. 2000. Corporate reorganizations and non-cash auctions. J. Finance 55:1807–49
     [Google Scholar]
  77. Rhodes-Kropf M, Viswanathan S. 2004. Market valuation and merger waves. J. Finance 59:2685–718
     [Google Scholar]
  78. Rhodes-Kropf M, Viswanathan S. 2005. Financing auction bids. RAND J. Econ. 36:789–815
     [Google Scholar]
  79. Schwert GW. 1996. Markup pricing in mergers and acquisitions. J. Financ. Econ. 41:153–92
     [Google Scholar]
  80. Shleifer A, Vishny RW. 1992. Liquidation values and debt capacity: a market equilibrium approach. J. Finance 47:1343–66
     [Google Scholar]
  81. Shleifer A, Vishny RW. 2003. Stock market driven acquisitions. J. Financ. Econ. 70:295–311
     [Google Scholar]
  82. Singh R. 1998. Takeover bidding with toeholds: the case of owner's curse. Rev. Financ. Stud. 11:679–704
     [Google Scholar]
  83. Skrzypacz A. 2013. Auctions with contingent payments—an overview. Int. J. Ind. Organ. 31:666–75
     [Google Scholar]
  84. Thorburn KS. 2000. Bankruptcy auctions: costs, debt recovery, and firm survival. J. Financ. Econ. 58:337–68
     [Google Scholar]
  85. Uysal VB. 2011. Deviation from the target capital structure and acquisition choices. J. Financ. Econ. 102:602–20
     [Google Scholar]
  86. Vladimirov V. 2015. Financing bidders in takeover contests. J. Financ. Econ. 117:534–57
     [Google Scholar]
  87. Zheng CZ. 2001. High bids and broke winners. J. Econ. Theory 100:129–71
     [Google Scholar]
/content/journals/10.1146/annurev-financial-012720-013903
Loading
Strategic Decisions in Takeover Auctions: Recent Developments
Annual Review of Financial Economics 12, 237 (2020); https://doi.org/10.1146/annurev-financial-012720-013903
/content/journals/10.1146/annurev-financial-012720-013903
/content/journals/10.1146/annurev-financial-012720-013903
Loading

Data & Media loading...

  • Article Type: Review Article

Most Cited Most Cited RSS feed

This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error