Auctions vs. negotiations in takeovers with initial stakes |
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| Authors: | Gino Loyola |
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| Institution: | 1. School of Business Trinity College, Dublin 2, Ireland;2. KBC Bank, Dublin 2, Ireland;3. Institute for International Integration Studies (IIIS), The Sutherland Centre, Level 6, Arts Building, Trinity College, Dublin 2, Ireland;4. Glasgow Business School, Glasgow Caledonian University, Cowcaddens Rd, Glasgow, Lanarkshire G4 0BA, United Kingdom;5. Faculty of Economics, University of Ljubljana Kardeljeva ploscad 17, Ljubljana 1000, Slovenia |
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| Abstract: | Takeover attempts from raiders with prior stakes in the target company (toeholds) are frequent in the market for corporate control. In this context, we propose a simple and realistic selling mechanism with an agenda of exclusive negotiations that discriminates against larger-toehold raiders. When a reserve price is absent, it is shown that this negotiation procedure outperforms, in terms of expected target price, conventional auctions frequently used to model takeover battles. However, when standard auctions can be improved with an optimal reserve price, our results indicate that this target price superiority is sensitive to the degree of toehold asymmetry. |
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