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The economics of club bidding and value creation

Author Info

Listed author(s):
  • Marquez, Robert
  • Singh, Rajdeep

Abstract

Many acquisitions are conducted by clubs, i.e., coalitions of acquirers that submit a single bid. We present a novel analysis of club bidding where the club creates value by aggregating, at least partially, bidders' values. We show that club formation can lead to higher acquisition prices when the number of bidders is exogenously fixed and large. However, when entry costs require bidders to optimize their participation decisions, club formation acts as an endogenous limit on competition and reduces the target's premium. In contrast, social efficiency with club bidding is always higher. Our findings can reconcile the contradictory evidence on club bidding.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304405X12002462
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 108 (2013)
Issue (Month): 2 ()
Pages: 493-505

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Handle: RePEc:eee:jfinec:v:108:y:2013:i:2:p:493-505
DOI: 10.1016/j.jfineco.2012.12.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

Keywords: Club bidding; Joint bidding; Mergers and acquisitions; Takeover auctions; Private equity;

Find related papers by JEL classification:

  • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
  • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
  • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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  1. Shourun Guo & Edith S. Hotchkiss & Weihong Song, 2011. "Do Buyouts (Still) Create Value?," Journal of Finance, American Finance Association, vol. 66(2), pages 479-517, 04.
  2. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, vol. 82(3), pages 579-599, June.
    • McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. C.E. Moody Jr. & W.J. Kruvant, 1988. "Joint Bidding, Entry, and the Price of OCS Leases," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 276-284, Summer.
  4. Jeremy Bulow & Paul Klemperer, 2002. "Prices and the Winner's Curse," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 1-21, Spring.
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  6. Larry M. DeBrock & James L. Smith, 1983. "Joint Bidding, Information Pooling, and the Performance of Petroleum Lease Auctions," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 395-404, Autumn.
  7. Baker, George P. & Wruck, Karen H., 1989. "Organizational changes and value creation in leveraged buyouts : The case of the O.M. Scott & Sons Company," Journal of Financial Economics, Elsevier, vol. 25(2), pages 163-190, December.
  8. Mailath, George J. & Zemsky, Peter, 1991. "Collusion in second price auctions with heterogeneous bidders," Games and Economic Behavior, Elsevier, vol. 3(4), pages 467-486, November.
  9. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-465, Autumn.
  10. Jesse Edgerton, 2012. "Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts," Journal of Finance, American Finance Association, vol. 67(6), pages 2187-2213, December.
  11. Richard Harris & Donald S. Siegel & Mike Wright, 2005. "Assessing the Impact of Management Buyouts on Economic Efficiency: Plant-Level Evidence from the United Kingdom," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 148-153, February.
  12. Graham, Daniel A & Marshall, Robert C, 1987. "Collusive Bidder Behavior at Single-Object Second-Price and English Auctions," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1217-1239, December.
  13. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
  14. Boone, Audra L. & Mulherin, J. Harold, 2011. "Do private equity consortiums facilitate collusion in takeover bidding?," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1475-1495.
  15. Brown, David T. & Fee, C. Edward & Thomas, Shawn E., 2009. "Financial leverage and bargaining power with suppliers: Evidence from leveraged buyouts," Journal of Corporate Finance, Elsevier, vol. 15(2), pages 196-211, April.
  16. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
  17. Pavlov, Gregory, 2008. "Auction design in the presence of collusion," Theoretical Economics, Econometric Society, vol. 3(3), September.
  18. Vlad Mares & Mikhael Shor, 2008. "Industry concentration in common value auctions: theory and evidence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(1), pages 37-56, April.
  19. Officer, Micah S. & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Club deals in leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 98(2), pages 214-240, November.
  20. Joris Pinkse & Guofu Tan, 2005. "The Affiliation Effect in First-Price Auctions," Econometrica, Econometric Society, vol. 73(1), pages 263-277, 01.
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Cited by:

  1. Liu, Tingjun, 2016. "Optimal equity auctions with heterogeneous bidders," Journal of Economic Theory, Elsevier, vol. 166(C), pages 94-123.
  2. Kim, Tae-Nyun & Palia, Darius, 2014. "Private equity alliances in mergers," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 10-20.
  3. Malenko, Andrey & Malenko, Nadya, 2015. "A theory of LBO activity based on repeated debt-equity conflicts," Journal of Financial Economics, Elsevier, vol. 117(3), pages 607-627.
  4. Hong Zhu & Qi Zhu, 2016. "Mergers and acquisitions by Chinese firms: A review and comparison with other mergers and acquisitions research in the leading journals," Asia Pacific Journal of Management, Springer, vol. 33(4), pages 1107-1149, December.

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