PhD Lunch Seminars Amsterdam

Tiantian Huang (Erasmus University Rotterdam)

This paper analyzes the impact of search costs on the target’s choice of the sales procedures. We develop a dynamic model of private takeover process prior to the public merger announcement. Due to the presence of market imperfection, the target has to commit time and efforts to find a suitable buyer. We therefore provide a rationale for the limited use of auction in practice. In addition, we show that in equilibrium, the chance of an auction as well as the optimal number of bidders contacted in an auction is endogenously determined. Based on the equilibrium, the model generates several predictions. In particular, the model predicts that the payoffs to the target in an auction with multiple bidders do not always dominate the payoffs in a one-to-one negotiation. The difference in the target premiums between the two sales procedures ultimately depends on the target’s search ability. The model also relates the dispersion in the bidders’ valuation to the sales procedures and the type of bidders. The model is solved numerically and its results are related with the empirical evidence.