Imperfect Information and the Tender Offer Auction

Managers of companies for which takeover bids have been or are likely to be made--"targets"--engage in a variety of tactics designed to minimize the likelihood of a takeover or increase the price an acquirer must ultimately pay. The welfare effects of these tactics are in dispute. This paper considers one such tactic, the running of "auctions" by managers of a target after an initial bid has been made; an auction is held if, as is often the case, the target's managers can interest other companies in bidding. This paper argues that auctions reduce welfare because they dampen search for suboptimally run firms, and do not have a comparative advantage over unregulated markets in moving corporate assets to their highest valued uses. Further, the shareholders of targets do not have property rights to the gains from takeovers that auctions could be viewed as protecting, Hence, the law that now permits auctions to occur should be changed.