Showing papers on "Bidding published in 1989"

Do Managerial Objectives Drive Bad Acquisitions

Abstract: This paper documents for a sample of 327 US acquisitions between 1975 and 1987 three forces that systematically reduce the announcement day return of bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target , and when the performance of its managers has been poor before the acquisition. These results are consistent with the proposition that managerial rather than shareholders' objectives drive bad acquisitions.

Auctions and Bidding: A Primer

Abstract: Maybe the contractor was right to think bid jobs are different, but it is more likely that he suffered from too simple a view of what is involved in preparing a competitive bid. Our analysis will show that even an experienced estimator working in familiar terrain can lose money if he doesn't understand the subtleties of competitive bidding. The phenomenon experienced by the painting contractor, known as the " Winner's Curse," is just one of the surprising and puzzling conclusions that have been turned up by modern research into auctions. Another is the theoretical proposition (supported also by some experimental evidence) that, for example, a sealed-bid Treasury bill auction in which each buyer pays a price equal to the highest rejected bid would yield more revenue to the Treasury than the current procedure in which the winning bidder pays the seemingly higher amount equal to his own bid. There are also subtle results that demonstrate the equivalence of such apparently different institutions as the standard sealed-bid auction, in which the auctioneer/seller sells the goods to the highest bidder for a price equal to his bid, and the Dutch auction, in which the auctioneer/seller begins by asking a high price and gradually lowers the price until

Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions

Abstract: The medium of exchange in acquisitions is studied in a model where (i) bidders' offers bring forth potential competition and (ii) targets and bidders are asymmetrically informed. In equilibrium, both securities and cash offers are observed. Securities have the advantage of inducing target management to make an efficient accept/reject decision. Cash has the advantage of serving, in equilibrium, to "preempt" competition by signaling a high valuation for the target. Implications concerning the medium of exchange of an offer, the probability of acceptance, the probability of competing bids, expected profits, and the costs of bidders are derived. IN STRUCTURING ITS OFFER to acquire a firm, an acquirer must, among other things, determine the medium of exchange of the offer. That is, an acquirer must choose whether the payment will be in the form of cash, debt, equity, or some combination. With symmetric information, no transactions costs, and no taxes, the medium of exchange is irrelevant. This is not the case, though, if these assumptions are not satisfied. This paper studies the role of the medium of exchange in acquisitions in a setting in which there is asymmetric information between a target and competing bidders. The focus of the paper is on the role of the medium of exchange in preempting competition. Consider a bidder that studies the profitability of an acquisition. If it makes a bid, other potential bidders will observe the bid, learn of the potentially profitable acquisition, and perhaps compete for it. A preemptive bid may be a way to eliminate this competition. Suppose a competing bidder's expected payoff is decreasing in the initial bidder's valuation for the target. When bidding against an initial bidder with a high valuation, a competitor may face a low probability of winning the bidding and a low expected payoff given that it does win. In this case, if the initial bidder could signal a sufficiently high valuation, it could deter the competition. As Fishman [7] and P'ng [18] have shown, a high bid can signal a high valuation and thus serve to preempt competition. Both studies, however, deal only with cash offers. (See also Giammarino and Heinkel [9] and Khanna [14].) A key difference between a cash offer and a (risky) securities offer is that a security's value depends on the profitability of the acquisition, while the value of cash does not. In the studies cited above, bidders, but not the target, have private

The Returns to Acquiring Firms in Tender Offers: Evidence from Three Decades

Abstract: M Extensive empirical evidence supports the view that takeovers are beneficial to the shareholders of target firms.I Virtually every study has found that these shareholders receive large premiums, averaging about 30%, for their shares. The wealth effects on shareholders of acquiring firms, however, are much more puzzling. Researchers measuring these wealth effects have found them to average close to zero and to be negative for some categories of offers. The same logic that argues that large premiums paid in takeovers are evidence that takeovers benefit shareholders of target firms, also leads some to argue that the absence of stock price increases (and the existence of stock price declines in some cases) for bidding firms reflects neutral (or bad) investments by management of bidding firms. In this study, shareholder wealth effects in tender offers are examined and, more specificly, characteristics of tender offer bids that may determine the returns earned by the shareholders of acquiring firms are explored. For more than 450 tender offers from 1963-1986, We thank Paula Moolhuyzen, Ken Lehn, Jeffry Netter, and the referees of this journal for many helpful comments and suggestions. The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission of of the authors' colleagues on the staff of the Commission.

Bidding for Firms

Abstract: Recently, Toyota sought a plant location in the United States. The $800-million plant will employ 3000 workers, and numerous states offered Toyota generous investment incentives, hoping this would induce Toyota to select their state. The Commonwealth of Kentucky won this competition, but the price was high: the present value of the payments exceeds $125 million. The payment of investment incentives for the Toyota plant is not unique. In 1976 Pennsylvania paid $75 million to attract a Volkswagen plan,; Nissan, Honda, and Mazda received generous investment incentives when locating plants in the United States. And this bidding is not limited to states. To attract the headquarters of the Presbyterian Church (USA), with its 1300 jobs and $38 million annual payroll, civic leaders in Louisville, Kentucky, offered the church a warehouse and $6.2 million for renovation of the structure, bidding the church away from Kansas City, Missouri.' In this paper, we contend that this competition may result from the average cost pricing of publicly provided goods and services.2 When the marginal cost of providing a firm and its workers with public services is less than the tax revenue they generate, a government may offer the firm subsidies that reduce the distortions the average cost pricing of the public service creates. Thus, this competition for industry is not a zero-sum game where the subsidies are only transfers from the government to the firm. Rather, these subsidies may facilitate the efficient location of industry.

Allocation of Order Quantity among Suppliers

Abstract: Allocation of Order Quantity Among Suppliers This article presents a linear programming model that can be used in the simultaneous determination of the number of suppliers to utilize and the purchase quantity allocations among suppliers in a multiple sourcing system. The model is simple and powerful. It can be used to make rational multiple sourcing decisions. INTRODUCTION In 1973, the U.S. supply of crude oil was cut by 15 percent due to the O.P.E.C. oil embargo. Refineries that had contractual agreements with a single foreign supplier found themselves without raw crude oil and had to make "spot purchases" at $40 per barrel, 20 percent higher than many buyers with several suppliers were paying. Recently, the U.S. Under Secretary of Defense for Acquisition, Mr. Robert Costello, has noted that he will demand more competitive bidding on contracts to streamline cost and improve quality.[1] These examples make it clear that a multiple sourcing policy for certain types of purchases is still recognized as a useful approach to ensure the reliability of a manufacturer's supply stream. Notwithstanding the current emphasis on supplier base reduction, if done properly multiple sourcing can also reduce costs and improve quality in many cases. In a multiple sourcing operation, a buyer purchases the same item from more than one vendor. These suppliers can be employed alternately or concurrently. In the case of large volume purchases, requirements are split among several vendors. Most purchasing authorities agree that when buyers use more than one supplier for critical materials, the buying firm generally will be protected more fully in times of shortage as a result of its alternate sources.[2] Although multiple sourcing has been used for years, a simple reliable approach has never been developed for making decisions about the number of suppliers to use and the optimal volume of business to allocate among them. In this article, a linear programming model is proposed for use in the simultaneous determination of the optimal number of suppliers and order quantity allocations among them. The article is divided into three parts: (1) an overview of the model, (2) an illustrative example, and (3) a conclusion. ALLOCATION OF ORDER QUANTITY AMONG SUPPLIERS The buying firm, before implementing a multiple sourcing policy, has to specify the number of suppliers to employ. The buyer then needs to determine the distribution of order quantities among vendors. Some authorities, for example, have suggested that two suppliers be used for a material category that has an annual dollar volume higher than a given predetermined level. The order quantity may be split between suppliers on something other than a 50-50 basis to promote competition between suppliers and to improve purchasing performance.[3] Supplier performance is usually measured in terms of the delivered cost, product quality, delivery, and service.[4] The purchasing performance of a multiple sourcing system is a weighted average of performances of all suppliers, with each supplier's weight being equal to the percentage of the order quantity it receives. In order to ensure that the system is optimal, a model is needed for decisions on the number of vendors to use and the allocation of order quantities among them. These problems can be solved simultaneously by a linear programming model. To illustrate, assume a buyer wishes to minimize aggregate purchasing price subject to the constraints that quality, delivery, and service performances of the system are higher than some predetermined levels. This relationship can be represented by the linear program as follows: Minimize: Aggregate Price Subject to: Aggregate Quality: [is greater than or equal] Q Aggregate Lead Time: [is less than or equal] L Aggregate Service: [is greater than or equal] S Q, L, and S are the predetermined levels of quality, delivery, and service. …

The auction algorithm for the transportation problem

Abstract: The auction algorithm is a parallel relaxation method for solving the classical assignment problem. It resembles a competitive bidding process whereby unassigned persons bid simultaneously for objects, thereby raising their prices. Once all bids are in, objects are awarded to the highest bidder. This paper generalizes the auction algorithm to solve linear transportation problems. The idea is to convert the transportation problem into an assignment problem, and then to modify the auction algorithm to exploit the special structure of this problem. Computational results show that this modified version of the auction algorithm is very efficient for certain types of transportation problems.

Auctions with resale markets : an exploratory model of treasury bill markets

Abstract: This paper develops a model of competitive bidding with a resale market. The primary market is modelled as a common-value auction, in which bidders participate for the purpose of resale. After the auction the winning bidders sell the objects in a secondary market and the buyers on the secondary market receive information about the bids submitted in the auction. The effect of this information linkage between the primary auction and the secondary market on bidding behaviour in the primary auction is examined. The auctioneer's expected revenues from organizing the primary market as a discriminatory auction versus a uniform-price auction are compared, and plausible sufficient conditions under which the uniform-price auction yields higher expected revenues are obtained. An example of our model, with the primary market organized as a discriminatory auction, is the U.S. Treasury bill market. *We thank John Cox for kindling our interest in Treasury bill auctions and Margaret Meyer for helpful conversations. We are grateful to Chiang Sung of the Chemical Bank for answering many of our questions on the organization of Treasury bill auctions. We would also like to acknowledge helpful comments from seminar participants at City College of New York, Princeton, Stanford and UCLA. The second author is grateful for support under the Batterymarch Fellowship Program. ^Anderson Graduate School of Management, University of California, Los Angeles, CA 90024 'Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02139

The Winner's Curse and Bidder Competition in Acquisitions: Evidence from Failed Bank Auctions

Abstract: This study examines the effect of bidder competition in acquisitions. We use predictions from auction theory to test whether acquirers of failed banks overpay (the "winner's curse") when bidding in FDIC sealed-bid purchase and assumption (P&A) transactions (auctions). The empirical results indicate that winning bids tend to increase as the number of competitors increases, as predicted by theory. We also find that bid levels of all bidders increase with increased competition, which is consistent with bidders' failing to adjust for the winner's curse in a common value auction setting. However, additional tests using winning bids only are consistent with both a common value and a private values model, so this result should be interpreted with caution. THE WINNER'S CURSE HYPOTHESIS states that the winner of a sealed-bid auction in which the value of the object being competed for is uncertain tends to be the one who most overestimates the true value of the auctioned object. As a result, auction winners who fail to recognize this possibility are likely to be "cursed" by having paid more for the object than its true worth. This hypothesis has been applied to various situations, including bidding on oil and gas leases (Capen et al. [3]), and corporate takeovers (Roll [16], Varaiya [19]). Support for the existence of the winner's curse has been reported primarily from laboratory experiments (Bazerman and Samuelson [1], Kagel and Levin [12]). Testing of the "winner's curse hypothesis" with market data is in its early stages. Gilley, Karels, and Leone's [7] study of bidding for oil leases provides mixed suport. Brannman, Klein, and Weiss [2] examine bidding behavior in a variety of auction markets and interpret some of their results as supporting the winner's curse hypothesis. Our study examines the effects of bidder competition and the winner's curse hypothesis within the context of FDIC auctions of failed banks. Our study may also have relevance for the broader corporate control literature. This literature uniformly indicates that shareholders of acquired firms earn large

Facilitation of Competing Bids and the Price of a Takeover Target

Abstract: Facilitation of Competing Bids and the Price of a Takeover Target Abstract Initially uninformed bidders must incur costs to learn their (independent) valuations of a potential takeover target. The first bidder makes either a preemptive bid that will deter the second bidder from investigating, or a lower bid that will induce the second bidder to investigate and possibly compete. We show that the expected price of the target may be higher when the first bidder makes a deterring bid than when there is competitive bidding. Hence, by weakening the first bidder’s incentive to choose a preemptive bid, regulatory and management policies to assist competing bidders may reduce both the expected takeover price and social welfare.

The Efficacy of Franchise Bidding Schemes in the Case of Cable Television: Some Systematic Evidence

Abstract: * I would like to thank Dennis Carlton, Richard Craswell, Victor Goldberg, David Henderson, Doug Joines, Paul Joskow, Joe Kalt, Ken Koford, Michael Levine, Tony Marino, Richard Schmalensee, an anonymous referee, and workshop participants at the University of Arizona; Claremont Colleges; Clemson University: Dartmouth College; the Department of Justice; Duke University; Rand Corporation; University of Santa Clara; University of Tennessee at Knoxville; University of California, Davis; University of California. Los Angeles; University of California, Santa Barbara: University of Southern California (USC): and Washington University. Elden Chang, David Franzblau, and Chris Murdoch provided valuable research assistance. The USC School of Business supplied generous research funding. See, for example, Harold E. Demsetz, Why Regulate Public Utilities'? 11 J. Law & Econ. 55 (1968); Richard A. Posner, The Appropriate Scope of Regulation in the Cable Television Industry, 3 Bell J. Econ. 211 (1972). 2 See, for example, Posner, note 1 supra; Richard Schmalensee, The Control of Natural Monopolies (1979); Oliver E. Williamson, Franchise Bidding for Natural Monopolies-in General and with Respect to CATV, 7 Bell J. Econ. 73 (1976).

The effect of regret on optimal bidding in auctions

Abstract: While most models of auctions and competitive bidding assume that each bidder's utility for an outcome depends only on his own profit, we allow the utility to also depend on any regret that a bidder suffers after the fact and characterize when and how this affects bidding. Specifically, a winner might regret “money left on the table” in Federal offshore oil lease sales, while a loser might regret seeing an object sell for less than his own value for it. We show that for risk-neutral bidders who, after the fact, know the winner's price for the object, a bidder's optimal bidding strategy will not depend on the relative weight given to profit versus regret if both forms of regret weigh equally heavily. However, if bidders weight money-left-on-the-table regret more heavily, then the bid taker suffers. Likewise, if losers do not learn the winner's price, then the bid taker also suffers. Thus, the existing models' exclusion of regret from risk neutral bidders' utility functions affects the applicability of the ...

Resolving Uncertainty about the Number of Bidders in Independent Private- Value Auctions: An Experimental Analysis

Abstract: Results from first-price, sealed-bid auctions, in which there is uncertainty regarding the number of bidders, are reported. Consistent with recent theoretical findings, concealing information regarding the number of bidders raises more revenue for the seller than revealing information. Individual bids show that (1) narrowly interpreted, the Nash equilibrium bidding theory underlying these theoretical predictions is rejected, as less than 50% of all bids satisfy the strict inequality requirements of the theory, but (2) a majority of the deviations from these inequality requirements favor the revenue-raising predictions of the Nash model, and, in a large number of cases, involve marginal violations of the theory.

Expected Revenue from Open and Sealed Bid Auctions

Abstract: In his preceding piece, Paul Milgrom has neatly laid out many of the core results of the recent literature on the theory of competitive bidding. My immediate goal here is to provide the simplest possible derivation of three basic revenue ranking theorems. Each of these compares the expected revenue obtained from open bidding, as in the typical art auction, with the expected revenue obtained when bids are sealed and the winner pays his bid. The first of the ranking theorems is the revenue equivalence theorem which establishes conditions under which these two seemingly very different auctions generate the same expected revenue for the seller. The other two theorems establish the effect of relaxing one of the key assumptions. When buyers are risk averse, the seller gains if buyers submit sealed bids and the winner pays his bid. On the other hand, if valuations of different buyers are positively correlated, rather than unrelated, the seller extracts more revenue in an open ascending bid auction. In reducing these theorems to their basic elements, my deeper goal is to provide the reader with a better intuitive understanding of the results.

Theories and Tests of Blind Bidding in Sealed-bid Auctions

Abstract: In this article we report the results from a series of laboratory markets in which sellers have better information about the quality of an item than any of the potential buyers. Sellers may voluntarily choose to reveal this information or they may instead decide to "blind bid" the item. We find that a sequential equilibrium model where buyers "assume the worst" is a good predictor of behavior in these simple markets. This equilibrium is not instantaneously attained, however, but there is an unraveling process which describes how this equilibrium is approached. At the conclusion of the market, allocations tend to be full efficient, ex post.

Dynamic Consistency, Revelations in Auctions and the Structure of Preferences

Abstract: Analyzing the optimal bidding behaviour in ascending-bid auctions and second-price sealed-bid auctions with independent private values, we show that expected utility maximizing behaviour is equivalent to: (a) dynamically consistent bidding in ascending-bid auctions; (b) the equivalence of the optimal bids in ascending-bid auctions and in second-price sealed-bid auctions; (c) bidding the value of the object in second-price sealed-bid auctions. In addition, the optimal bid in ascending-bid auctions equals the value of the object if and only if the bidder's preferences on lotteries are both quasi-concave and quasi-convex.

Escalation and Cooperation in Conflict Situations The Dollar Auction Revisited

Abstract: We present a new game-theoretic analysis of an abstract auction game that captures essential strategic aspects of escalation phenomena. Two competitive adversaries commit resources irreversibly in order to win an indivisible prize; the winner will take the prize while both winner and loser incur the cost of their bids (investments). Following O'Neill (1986), we first reexamine a discrete version of the game and emphasize some strategic considerations that give rise to new bidding strategies of players. These new strategies, however, confirm O'Neill's result qualitatively: Rational players should not bid against each other. We then introduce a more general model of the game and show that escalatory competitive bids are compatible with equilibrium play. Equilibria with escalating bidding eventually realize a “draw”: Initial firmness (leading to escalation) is followed by conciliatory behavior that eventually implements a common commitment level.

東アジア原子力安全保障システムの構築(その1)世界における原子力発電所(原発)事故事象の統計分析

Abstract: In this paper several examples of government contracts with private firms are examined to see how experience conforms to a principal-agent model of cost minimization via competitive bidding and how important are the many qualifications to the model. Fifteen cases of local government contracting are examined.

Tender Offer Auctions, Resistance Strategies, and Social Welfare

Abstract: In a seminal article, Easterbrook and Fischel argue that social welfare would be increased if corporate managers were precluded from conducting an auction for control of their firms once they had become the target of a tender offer. Auctions increase the price the successful bidding firm must pay for the target firm's shares. Though this ex-post wealth transfer (from the stockholders of the acquiring firm to those of the target firm) has no clear welfare implications, the ex-ante reduction in the gains to acquiring firms from an anticipated auction reduces the incentives of potential acquirers to search for potential targets. Thus, they argue that a legal regime that facilitates auctions will result in less search and fewer value-increasing takeovers. In conclusion, Easterbrook and Fischel advocate a mandated rule of passivity on the part of target managers. In a series of articles, Bebchuck (1982a; 1982b) and Gilson (1982) take exception to the Easterbrook and Fischel passivity rule and argue that social welfare is enhanced by allowing target managers to conduct auctions for their firms. They argue that the beneficial effects of moving the target's resources to their highest-valued use via an open auction outweigh what they consider to be the negligible deterrent effect on the incentives of potential acquirers to search for potential targets.

Random Reservation Prices and Bidding Behavior in OCS Drainage Auctions

Abstract: R E C E N T surveys of the economic literature on auctions1 indicate that there has been a great deal of theoretical work on the properties of equilibrium behavior in auctions and on the design of auctions to maximize the seller's revenues in the presence of optimizing bidders. However, there has been very little empirical work, using field data, that attempts to test various behavioral theories or, indeed, to see whether they are of any practical interest. There has been some good experimental work2 but the relatively small stakes involved in these experimental games, and the relative inexperience of the subjects (given the potential complexity of equilibrium strategies), leave a useful role for the careful study of a detailed field data set. This article analyzes such a data set, the first-price, sealed-bid auctions of drainage and development leases on federal land in

Bank Merger Pricing Premiums and Interstate Bidding

Abstract: Bank merger activity has accelerated in the last several years. There is little doubt that the high level of activity is due in part to the fact that many states has dismantled interstate banking prohibitions. By early 1987, nine states and the District of Columbia permitted entry by banks from any state, and 27 other states permitted entry by banks from states in their regions. Of the latter, nine have made provisions for a transition to nationwide banking in just a few years.

Contract bidding in construction : strategic management and modelling

Abstract: This volume adopts a systems approach to the various problems of contract bidding. It describes the building of a strategic decision system to aid in decision-making, examines the key elements involved in its successful operation, and then applies statistical models to aspects of the system.

Fee versus Quality

Abstract: Mr. DeFraites, a former COFPAES Chairman, discusses the quality of the design product as it relates to an owner's professional selection and procurement procedure. Project quality, the level of professional services to be provided, and fee are all related to the procurement process. Bidding establishes an adversarial relationship between the owner and the design professional; it is expensive and time‐consuming. The innovative ability of the design professional is not evaluated in a bidding process. The qualification‐based selection process results in a compatible owner/design professional team truly representing the best interest of the owner. “Price‐as‐a‐factor” procurement procedures have all of the disadvantages of straight bidding plus considerable additional cost to the design professionals involved.

Evaluation methods in competitive bidding for electric power

Abstract: Competitive bidding for new electricity generation is a rapidly growing phenomenon. A number of utilities have completed auctions for long-term power contracts with private suppliers, and more are being proposed. Yet despite all of this activity, there has not been any systematic analysis of the design choices posed by this process. Are these procedures economic What biases are built into the process How are various objectives traded off against one another in the implementation of competitive bidding In this report we undertake a systematic analysis of some of the competitive bidding procedures that have been used or are being proposed at the state level. We take no position on the larger political debate surrounding this process. These policy issues, raised principally by initiatives of the Federal Energy Regulatory Commission (FERC), address the scope and appropriateness of competitive bidding. 58 refs., 9 figs., 23 tabs.

Competitive Bidding In Electricity Markets: A Survey

Abstract: A number of states as well as the Federal Energy Regulatory Commission have been considering whether traditional regulatory regimes in electricity and natural gas markets should be replaced with competitive bidding systems. This shift is designed to yield a more efficient allocation of energy resources within the existing legal framework The paper examines both the theoretical basis and empirical evidence on bidding processes in light of the characteristics of energy markets, especially electricity markets. It then discusses the extent to which one can draw policy conclusions about designing specific bidding processes for these markets. It concludes that given the underlying complexity of the products involved, the optimal system for procuring power should include a mix of bidding negotiation and utility construction.

Non–price concessions and the effect of franchise bidding schemes on cable company costs

Abstract: Among the potentially important problems with franchise bidding schemes is the possibility that franchisers may extract non-price concessions, 'merit goods', from competing bidders at the expense of lower prices for 'plain vanilla' service. The systematic evidence presented in this paper suggests that the pursuit of such non-price concessions in the case of cable franchise competitions is substantial. Expenditures on non-price concessions account for 26% of cable construction costs and 11 % of operating costs. The pursuit of non-price concessions by local franchising authorities appears to have two negative economic efficiency consequences. First, expenditures on such concessions appear to provide only a limited amount of economic benefits. Second, by raising costs, spending on non-price concessions inhibits the ultimate level to which prices can be held by franchise bidding schemes