Assistant Professor Rafael Rogo is questioning the effectiveness of auctions in corporate mergers and acquisitions. Further research could lead to a redrafting of corporate trading policies and regulations, such as the precedent-setting ruling against cosmetic giant Revlon.
The 1985 ruling states that when a corporation is for sale it is the moral responsibility of the organization to accept the highest bid, thus ensuring the financial interest of shareholders is front and centre.
Implicit in this ruling is an assumption that organizations be sold via auction; a sales method traditionally viewed as the premier selling vehicle, based on the premise that auctions attract multiple buyers who drive up prices.
But is this auction approach really the most effective? Rogo isn’t so sure.
Rogo’s research in the area of corporate mergers and acquisitions focuses on a comparison of one-to-one (bilateral) versus auction sales in the corporate merger or takeover process. Rogo’s interest in this topic was piqued when he discovered that almost 50 per cent of corporate sales were completed using a bilateral negotiation process as opposed to an auction format. Further study led him to hypothesize that the presence of strategic information may actually be a factor when choosing an effective selling mechanism.
Strategic information is the kind of data that is known only to the specific organization within which it resides. For example, information on a new product that is about to be launched is not known to potential purchasers thus its value may not be reflected in offers to purchase.
In order to increase its selling price, a company may choose to release this information to potential buyers who sign disclosure agreements. Even though there is a risk of enhanced disclosure costs and information leaks, this bilateral negotiation selling method can be more effective than engaging in a bidding competition.
To test this hypothesis Rogo examined a number of background of the merger disclosures to ascertain whether firms were sold via auction or bilateral negotiation and whether the presence of strategic information had an impact on the selected selling mechanism. By evaluating factors such as the number of disclosure agreements signed, earnings quality over a given period of time, and investment into research and development, he was able to demonstrate a direct correlation between presence of strategic information and choice of bilateral negotiations as the selling mechanism.
“My findings could bring into question the long held view that auctions are the most effective sales method in corporate mergers and acquisitions,” noted Rogo. “If further research in this area supports my findings, I foresee a redrafting of corporate trading policies and regulations, such as the Revlon ruling.”
Learn more about Assistant Professor Rafael Rogo and his research.