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Corporate Restructuring and Corporate Auctions

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  • Audra L. Boone

    (School of Business Administration, College of William and Mary)

  • J. Harold Mulherin

    (Claremont McKenna College)

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    Abstract

    We study 298 firms that announce the intent to consider restructuring during the 1989 to 1998 period. We find that the actions taken subsequent to the initial restructuring consideration are equally divided between (i) being acquired, (ii) divesting one or more subsidiaries, or (iii) either terminating the process or declaring bankruptcy. There is a greater completion rate in the second half of the sample, which suggests that economywide factors influence the restructuring decision. For the average firm in the sample, restructuring is a positive net present value decision, although sustained positive shareholder returns accrue only to the firms that actually complete restructuring. For a sub-sample of firms that are acquired, we detail the private auction process that is initiated and conducted by the selling firms and their investment banks. In the private auction, 80 percent of the selling firms have multiple bidders, even though only 20 percent of these cases have more than one publicly announced bidder. The depth of the private auction affects the runup of stock prices prior to the formal acquisition offer, suggesting a reinterpretation of the traditional explanations for the variation in premiums across target firms. The use of private auctions by selling firms also suggests one reason for the absence of toeholds in many mergers as well as the occurrence of multiple public bids even when there is only a single public bidder in a merger.

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    Bibliographic Info

    Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2002-38.

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    Handle: RePEc:clm:clmeco:2002-38

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    1. Professor Paul Klemperer, 2000. "What Really Matters in Auction Design," Microeconomics, EconWPA 0004008, EconWPA.
    2. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
    3. Clark, Truman A & Weinstein, Mark I, 1983. " The Behavior of the Common Stock of Bankrupt Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 38(2), pages 489-504, May.
    4. Mikkelson, Wayne H. & Ruback, Richard S., 1985. "An empirical analysis of the interfirm equity investment process," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(4), pages 523-553, December.
    5. Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, American Finance Association, vol. 56(6), pages 2135-2175, December.
    6. Paul Klemperer & Jeremy Bulow, 1998. "Toeholds and Takeovers," Economics Series Working Papers 1998-W04, University of Oxford, Department of Economics.
    7. Sanders, Ralph W. & Zdanowicz, John S., 1992. "Target Firm Abnormal Returns and Trading Volume around the Initiation of Change in Control Transactions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 109-129, March.
    8. Schwert, G.W., 1994. "Mark-up Pricing in Mergers and Acquisitions," Papers, Rochester, Business - Financial Research and Policy Studies 95-01, Rochester, Business - Financial Research and Policy Studies.
    9. Bradley, Michael & Desai, Anand & Kim, E. Han, 1983. "The rationale behind interfirm tender offers : Information or synergy?," Journal of Financial Economics, Elsevier, Elsevier, vol. 11(1-4), pages 183-206, April.
    10. French, Kenneth R & McCormick, Robert E, 1984. "Sealed Bids, Sunk Costs, and the Process of Competition," The Journal of Business, University of Chicago Press, vol. 57(4), pages 417-41, October.
    11. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
    12. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1575-617, December.
    13. Hite, Gailen L. & Owers, James E. & Rogers, Ronald C., 1987. "The market for interfirm asset sales : Partial sell-offs and total liquidations," Journal of Financial Economics, Elsevier, Elsevier, vol. 18(2), pages 229-252, June.
    14. Hansen, Robert G, 2001. "Auctions of Companies," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 39(1), pages 30-43, January.
    15. Betton, Sandra & Eckbo, B Espen, 2000. "Toeholds, Bid Jumps, and Expected Payoffs in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 841-82.
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    Cited by:
    1. Denis, Diane K. & Shome, Dilip K., 2005. "An empirical investigation of corporate asset downsizing," Journal of Corporate Finance, Elsevier, Elsevier, vol. 11(3), pages 427-448, June.
    2. Archishman Chakraborty & Nandini Gupta & Rick Harbaugh, 2004. "Best Foot Forward or Best for Last in a Sequential Auction?," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2004-07, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    3. Moeller, Sara B. & Schlingemann, Frederik P. & Stulz, Rene M., 2004. "Firm size and the gains from acquisitions," Journal of Financial Economics, Elsevier, Elsevier, vol. 73(2), pages 201-228, August.
    4. Sara B. Moeller & Frederik P. Schlingemann & Rene M. Stulz, 2003. "Do shareholders of acquiring firms gain from acquisitions?," NBER Working Papers 9523, National Bureau of Economic Research, Inc.

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