Deal Process, Asymmetric Bidder and Target Premium

Boone and Mulherin (2007) document the private firm sale process and find that the wealth eff ects for target shareholders are comparable in both auctions and negotiations. Since auctions are more costly relative to negotiations, this begs the question of whether firms should use auctions. We hypothesize that sale process is most likely determined by the party that initiates the deal. In this paper, we collect a new variable denoted Initiator which identities the party that approaches the other first to initiate a deal talk. We hypothesize that when an acquirer initiates a deal, the acquirer will prefer a negotiated deal since in an auction other bidders may surface and force the acquirer to pay a higher premium. we find that most negotiation deals are in fact initiated by the acquirers. We also find evidence that the target firms receive higher excess returns in the deals initiated by the acquirers than in the deals initiated by the targets. We also find that most of the target initiated deals use auction, which indicates that the role of auction is to help the seller to find a buyer and increase the bargaining power. This paper serves to further our understanding of how the acquirer and the target interact to determine the deal form and the premium.