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Entry by Takeover: Auctions vs. Negotiations

We compare two mechanisms through which a potential entrant can take over an incumbent in a market with asymmetric firms: auctions (where other incumbents can bid for the target) and bilateral negotiations between the entrant and the target. The entrant’s choice of target depends on the mechanism, and it may not maximize ex-post profit or consumer welfare. In an auction, the entrant pays a higher price to take over a target with higher synergies, because they impose stronger negative externalities on incumbents and increase their willingness to pay for preventing entry. This provides a new rationale for takeover premia. Auctions increase the price obtained by the target, but reduce welfare compared to negotiation because they may discourage the entrant from acquiring a target with higher synergies.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 353.

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Date of creation: 27 Jan 2014
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Handle: RePEc:sef:csefwp:353
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  1. Philippe Jehiel & Benny Moldovanu, 2000. "Auctions with Downstream Interaction Among Buyers," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 768-791, Winter.
  2. Fishman, Michael J, 1989. " Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions," Journal of Finance, American Finance Association, vol. 44(1), pages 41-57, March.
  3. Whinston, Michael D., 2007. "Antitrust Policy toward Horizontal Mergers," Handbook of Industrial Organization, Elsevier.
  4. Fridolfsson, Sven-Olof, 2007. "A Consumer Surplus Defense in Merger Control," Working Paper Series 686, Research Institute of Industrial Economics.
  5. Cramton, Peter & Schwartz, Alan, 1991. "Using Auction Theory to Inform Takeover Regulation," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(1), pages 27-53, Spring.
  6. Inderst, Roman & Wey, Christian, 2004. "The incentives for takeover in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1067-1089, November.
  7. Sven-Olof Fridolfsson & Johan Stennek, 2005. "Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1083-1104, 09.
  8. Mehmet Ekmekci & Nenad Kos & Rakesh Vohra, 2013. "Just Enough or All: Selling a Firm," Working Papers 470, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Yeon-Koo Che & Tracy R. Lewis, 2007. "The role of lockups in takeover contests," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 648-669, 09.
  10. Mehmet Ekmekci & Nenad Kos, 2012. "Information in tender offers with a large shareholder," Working Papers 453, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  11. Boyan Jovanovic & Serguey Braguinsky, 2002. "Bidder Discounts and Target Premia in Takeovers," NBER Working Papers 9009, National Bureau of Economic Research, Inc.
  12. Michael J. Fishman, 1988. "A Theory of Preemptive Takeover Bidding," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 88-101, Spring.
  13. Funk, Peter, 1996. "Auctions with Interdependent Valuations," International Journal of Game Theory, Springer, vol. 25(1), pages 51-64.
  14. Gautam Gowrisankaran & Thomas J. Holmes, 2004. "Mergers and the Evolution of Industry Concentration: Results from the Dominant-Firm Model," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 561-582, Autumn.
  15. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2013. "Horizontal mergers with synergies: Cash vs. profit-share auctions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 382-391.
  16. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
  17. Gilbert, Richard J & Newbery, David M, 1992. "Alternative Entry Paths: The Build or Buy Decision," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 129-50, Spring.
  18. Sandro Brusco & Giuseppe Lopomo & David T. Robinson & S. Viswanathan, 2007. "Efficient Mechanisms For Mergers And Acquisitions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 995-1035, 08.
  19. Larry D. Qiu & Wen Zhou, 2007. "Merger waves: a model of endogenous mergers," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 214-226, 03.
  20. McCardle, Kevin F & Viswanathan, S, 1994. "The Direct Entry versus Takeover Decision and Stock Price Performance around Takeovers," The Journal of Business, University of Chicago Press, vol. 67(1), pages 1-43, January.
  21. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
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