Strategic Interactions in the Market for Corporate Control
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School of Business |
Bachelor's thesis
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Authors
Date
2021
Department
Major/Subject
Mcode
Degree programme
Bachelor’s programme in Economics
Language
en
Pages
26+5
Series
Abstract
In the market of corporate control, market participants engage in the exchange of control rights to corporate resources. The primary instrument for executing such transactions is a public takeover. Competitive bidding in public takeovers has many features bearing resemblance to auctions. In fact, the regulatory framework governing public takeovers explicitly obliges the management of the target company to act as an auctioneer to maximize the shareholder value. This thesis reviews economic literature where the strategic interactions between the parties of takeover processes are modelled using auction theory. The review spans three main areas: valuation, sequential bidding, and negotiations. While valuation can be quite effectively modelled using “general” interdependent auction models, the latter two constitute marked extensions to the general models. Therefore, the review is extended to cover takeover-specific literature in an attempt to produce an institutionally realistic view on the strategic interactions at hand. The approach taken with respect to takeover-specific literature is multidisciplinary. The review of economic theory is supported by examination of the applicable legal framework and relevant financial theory. A key finding of this thesis is that attempts to create a comprehensive takeover auction model are hindered by e.g. the intricacies in the institutional features of takeovers, the complexity of valuation and the multiplicity of different strategies available to the market participants. For example, the takeover institution has some features from both English and first-price auctions, and the structure of an auction might differ substantially depending on whether it is initiated through a non-solicited bid or negotiation. Secondly, it is shown that the valuations of different types of bidders are dependent on different value components. And finally, regulation in some cases greatly complicates the decision-making of the target management.Description
Thesis advisor
Stryjan, MiriKeywords
auction theory, market for corporate control, bidding strategies, merger negotiations