Auctions vs. negotiations in takeovers with initial stakes

Takeover attempts from raiders with prior stakes in the target company (toeholds) are frequent in the market for corporate control. In this context, we propose a simple and realistic selling mechanism with an agenda of exclusive negotiations that discriminates against larger-toehold raiders. When a reserve price is absent, it is shown that this negotiation procedure outperforms, in terms of expected target price, conventional auctions frequently used to model takeover battles. However, when standard auctions can be improved with an optimal reserve price, our results indicate that this target price superiority is sensitive to the degree of toehold asymmetry.

► We propose a negotiation procedure to sell a target when raiders have toeholds. ► It considers an agenda of negotiations giving priority to high-toehold raiders. ► As the price charged to these raiders is higher, a discriminatory rule is involved. ► Toehold asymmetry enlarges this bias and thus, target price is increased. ► Results suggest a coexistence of negotiation and auction formats in takeovers with toeholds.