126 S. Dasgupta and R.G. Hansen
auction generates a higher expected sale price than both the first- and the second-price
auctions when the toeholds are sufficiently asymmetric and not too small.
Another type of bidder asymmetry arises in the common value framework if the value
function is not symmetric, e.g.,v(t 1 ,t 2 )=αt 1 +( 1 −α)t 2 andα> 1 /2.Dasgupta
and Tsui (2003)show that with symmetric toeholds, the matching auction generates a
higher expected sale price than the first-price auction if the value function is sufficiently
asymmetric (i.e.,αsufficiently close to 0 or 1); and it generates a higher expected sale
price than the second-price auction if the value function is sufficiently asymmetric and
the toeholds are not too large.Povel and Singh (2006)characterize the optimal selling
mechanism for the zero toeholds case and show that discrimination against the strong
bidder is optimal. However, to implement the optimal mechanism, the seller needs to
know the precise value ofαas well as the distribution of the signals. This is not required
in the matching auction, for which only the identity of the stronger bidder is needed. In
other words, the matching auction is a “detail-free” mechanism. This is an especially
appealing property given that for sufficiently large asymmetry, the matching auction
does almost as well as the optimal mechanism in extracting the surplus.
4.6. Merger waves
There is no question that merger and acquisition activity goes in waves.Rhodes-Kropf
and Viswanathan (2004)give the following perspective: in 1963–1964, there were 3,311
acquisition announcements while in 1968–1969 there were 10,569; during 1979 to 1980
and also from 1990 to 1991 there were only 4,000 announcements while in 1999 alone
there were 9,278 announcements. The 1980s were generally a period of high merger
and acquisition activity, and saw the emergence of the hostile takeover and corporate
raiders, but activity dropped off in the early 90s only to rebound again late in the 90s.
Holmstrom and Kaplan (2001)review the evidence on merger waves and offer a macro
explanation based on changing regulatory and technological considerations which cre-
ated a wedge between corporate performance and potential performance, along with
developments in capital markets which gave institutional investors the incentives ands
ability to discipline managers.
Rhodes-Kropf and Viswanathan (2004)offer an alternative explanation for merger
waves based on an auction-theoretic model rich in informational assumptions. They
note that periods of high merger activity tend to be periods of high market valuation,
and the means of payment is generally stock. For example, the percentage of stock in
acquisitions as a percentage of deal value was 24% in 1990, but 68% in 1998. They
focus on mergers where stock is the means-of-payment. The essence of the argument
is as follows: stock values of both targets and acquirers can become over-valued on
a market-wide basis. These are economy-wide pricing errors that managers of neither
targets nor acquirers have information on, but they do know they occur. Managers of
targets know when their own stocks are overvalued; however, they do not know how
much of that is due to economy-wide pricing errors and how much is firm-specific.
When a stock offer is madein an overvalued market, target managers, knowing their