Handbook of Corporate Finance Empirical Corporate Finance Volume 1

118 S. Dasgupta and R.G. Hansen

prices. Hansen argues that some information in a corporate sale is competitive in nature,
and that its broad release can destroy value in the selling company. The seller therefore
faces a tradeoff between having many bidders and full disclosure versus protecting value
by limiting disclosure, as well as the number of bidders. While not modeling negotia-
tions formally, the analysis implies that negotiation with a single bidder may be optimal
if the “competitive information cost” is high enough. The model also explains the prac-
tice of a two-stage auction, with a first stage calling for non-binding “indications of
interest” (value estimates for the target) which are used to select bidders for the second
round and giving them access to more information on the selling company. If the selling
company uses the initial value estimates for the target to set a reserve price that is an
increasing function of the estimates, bidders in the initial round will reveal their private
valuations honestly and the selling company can select the most highly-valued bidders
for the final, binding, round (see the discussion below on the process for pricing IPOs
for an earlier similar finding).

4.3. Means-of-payment

Hansen (1985a, 1985b, 1986)has considered the role of non-cash means of payment in
the market for corporate control; this work has now been extended byDeMarzo, Kremer
and Skrzypacz (2005). In one model, Hansen shows that ex-post means of payment can
increase the seller’s revenue beyond what cash payments can do. Take an independent
private values context, wherevirepresents bidderi’s valuation of the target company.
An ascending auction with cash as the means of payment will yieldv 2 —the second
highest value—as the price. Consider, however, bidding using bidders’ stock as the
means-of-payment. Let each bidder have a common value,v, of her stand-alone equity.
Then each bidder will be willing to bid up tosi, wheresiis the share of firmioffered
(implicitly through an offer of equity) and is defined to make the post-acquisition value
of the bidder’s remaining equity equal to its pre-acquisition value:

v=(v+vi)( 1 −si),

which implies

si= (28)

vi

v+vi

.

The bidder with the highest valuation of the target will win this auction (siis increasing
invi) and she will have to offer a share defined byv 2 , the valuation of the second-highest
bidder. However, the value of this bid to the target will be

s 2 ∗(v+v 1 )=

v+v 1

v+v 2

v 2 >v 2

sincev 1 >v 2. The stock-based bidding therefore extracts more revenue from the high-
bidder than does cash bidding.DeMarzo, Kremer and Skrzypacz (2005)generalize this
result, showing that expected revenues are increasing in the “steepness” of the security