Abstract Of How Firms Are Sold

Observers have remarked that the takeover market during the 1990’s was less competitive than prior periods, with far fewer open auctions than would be expected. In this argument, competition is measured by the number of bidders who wish to publicly acquire a target company. Some have commented that this was due to increased use of tactics such as “poison pills” or more restrictive state antitrust laws during this period. The authors of the article entitled “How Are Firms Sold?” offer a different viewpoint: the definition of competition needs to be updated to include takeovers in which negotiations, and not public auctions, were utilized. If these takeovers are included in the mix, then the level of competition is approximately what should be expected. In fact, almost exactly half of the takeovers documented during the 1990’s of middle- to large-cap companies involved only one bidder.
Many takeovers only begin being documented publicly at the point at which the company announces an initial public bid, which is contrary to the negotiation process, in which the entire process is kept secret until the final bid is accepted by the target company. The number of bids is statistically shown to be higher for auctions than negotiations, in which it is typical for the number of bids to be lower (and closer to 1).
There are two hypotheses the authors highlight as possible reasons as to why or why not takeovers should include auctions. The first hypothesis is dubbed the “Agency Cost Hypothesis,” which states “auctions generate greater revenues than do negotiations and concludes that impediments to auctions harm target shareholders.”   The opposing hypothesis is the “Information Cost Hypothesis,” which contends that “the use of auctions is costly and concludes that auctions will not always dominate negotiations.”2
The authors created a test to see which hypothesis holds true, based on the concept that if wealth effects for auctions should supersede the wealth effect for...