The choice of sale method and its consequences in mergers and acquisitions

We examine the method by which firms are sold, auctions or one-on-one negotiations. We define and describe a subset of transactions that result from auction failure (i.e., target-attempted auctions that secure only one bidder). Controlling for endogeneity, firm, and transaction specific characteristics, we show that attempted auctions that resulted in one-on-one negotiations are associated with lower final premiums and higher acquirer returns compared with both successful auctions and pure negotiations (negotiations with only one bidder from the outset to the conclusion of the transaction). We find that several target, acquirer, and deal-specific characteristics affect the likelihood of auction failure. The loss of latent (perceived) competition that results from an unsuccessful attempt to auction the target partially shifts the wealth created by a merger or acquisition from targets' to acquirers' shareholders. To maximize shareholders' wealth, targets should carefully consider the likelihood of securing more than one interested bidder prior to initiating an auction.