Is There One Best Way to Sell a Company? Auctions Versus Negotiations and Controlled Sales1

Audra L. Boone and J. Harold Mulherin

Journal of Applied Corporate Finance, 2009, vol. 21, issue 3, 28-37

Abstract: For managements and boards that have decided that the value‐maximizing choice is to sell their companies, the board must then address another important question: what is the best way to sell the company? Should they use a wide‐ranging auction that seeks to attract the largest number of bidders, exclusive negotiation with a single bidder, or a “controlled sale” with a limited group of potential buyers? In a much cited 1996 article in the American Economic Review called “Auctions Versus Negotiations,” economists Jeremy Bulow and Paul Klemperer argued that there is “no merit in arguments that negotiation should be restricted to one or a few bidders to allow the seller to maintain control of the negotiating process.” But in their series of studies of the corporate M&A sales process over the past five years, the authors of this article have come to a very different conclusion. Contrary to the conventional wisdom, wide‐ranging auctions that seek the greatest number of bidders are far from the dominant approach. Roughly half of the large M&A deals investigated by the authors were accomplished through negotiations with single bidders. At the same time, full‐fledged auctions accounted for only about half of the deals involving multiple bidders, while the other half were classified as controlled sales aimed at a small number of carefully selected potential buyers. In their attempt to explain this preference for negotiations and controlled sales over auctions in M&A sales, the authors draw extensive parallels with the market for initial public offerings. As in the “bookbuilding” approach that now dominates the IPO process in virtually all global capital markets, the decision to limit the number of bidders through either negotiations or controlled sales appears to have the advantage of eliciting more aggressive bids from the “most qualified” buyers. Or, to put this another way, auctions appear to have the effect of discouraging such buyers from participating in the process.

Date: 2009
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