Tuesday, December 15, 2009

Why don't bidders like auctions?

In the Berkshire Hathaway Annual report, Warren Buffet tells us how he buys companies.
We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer —customarily within five minutes — as to whether we’re interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. We don’t participate in auctions.

When participation in an auction is costly, Buffet's dislike of auctions is explained by a recent article by Jeremy Bulow and Paul Klemperer.  They find that auctions are less efficient than sequential bargaining because too many bidders enter auctions.  But it is precisely because of this inefficiency that auctions return higher revenue to the seller, which is why Buffet doesn't participate in them.  And if you do find yourself in a sequential bargaining, try a pre-emptive offer to discourage the seller from searching further.

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