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Published November 2010 | Submitted
Journal Article Open

Negotiations under the threat of an auction


Many takeovers occur after one-on-one negotiations, which suggests a troubling lack of competition. We seek to determine whether acquirers in such friendly deals are truly insulated from competitive pressures. We study two countervailing influences: (1) potential but unobserved latent competition, i.e., the likelihood that rival bidders could appear, and (2) anticipated auction costs when negotiations fail. Using various proxies, we find that latent competition increases the bid premium offered in negotiated deals and that auction costs reduce the premium.

Additional Information

© 2010 Elsevier B.V. Received 14 January 2009, Revised 23 November 2009, Accepted 6 December 2009, Available online 18 June 2010. We thank Marina Balboa, Audra Boone, Espen Eckbo, Robert Hansen, Alexander Kempf, Harold Mulherin, Micah Officer (the referee), Angel Pardo, Antonio Rubia, Enrique Schroth, Piet Sercu, Karin S. Thorburn, participants of the American Finance Association annual meeting 2009 (San Francisco), the Core Economic Theory seminar, the European Finance Association annual meeting 2009 (Bergen), the French Finance Association annual meeting 2008, the KULeuven seminar, the Lille School of Management seminar, the Tuck School of Business research seminar, the University of Cologne research seminar, and the workshop on mergers at Valencia University for their many comments and suggestions. We also thank Armin Schwienbacher for providing data on private buyout fund investments. The second author acknowledges financial support from the University of Lille 2 (Finance, Banking, and Accounting Department) and the SKEMA Business School.

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