Create and answer a case study similar to Memo 10 from Time Warner (Most Relevant Chapters 11, 12, and 13)- which deals with the optimal auctioning mechanisms to sell off a division.
FINAL PAPER
Kelli Schoon-Saxsma December 07, 2011 Optimal Auctioning Mechanisms
Often times, company's will need to sell off all or part of their firms in order to either liquidate or survive. This is done via utilizing auctioning mechanisms. There are several options company's have regarding the type of auctioning method to use. This paper will discuss each method and its benefits and/or risks involved.
Generally, when a company is looking for a buyer, they will announce that they are seeking a buyer or exploring their options. In many of the cases researched firms hire an investment company or a firm with specific knowledge of the auctioning process to handle the actual action and sale. In the announcement there will be a statement of which firm was selected to handle the exploration of the company's options in how it will proceed. (Boone & Mulherin, 2003) The auction process then moves forward, which is what the rest of the paper will focus on.
In the auction process buyers are competing with one another to become the new owner of the firm or piece of firm being sold. The investment firm hired to handle the same will determine the type of auction best suitable for generating the highest bid, thereby getting the most money out of the potential buyer. The text states that in an auction, potential buyers compete for the right to own a good, service or more generally anything of value. Also stated, is there are four main types of auctioning mechanisms used that are described below.(Baye, 2009)
English Auction (ascending bid) The English auction is what is traditionally thought of when relating to an auction. Examples of this type of auction would be a car/equipment auction, antiques auction, livestock auction or an EBay auction. Goods are bid on and sold to the highest bidder. When bidding, you can see what the last bid was and bid higher if you think its worth more than the previous bid. This type of bidding will continue until no higher bids are placed or until time runs out.
First Priced, Sealed Bid The first price, sealed bid is where bidders write their bids on a piece of paper and are unaware of the other bidders bids. Just like the English auction the highest bidder wins. Most individuals equate this with silent auctions like those conducted at charity events. You are shown an item and use your best judgement as to the value and write down your value without knowing what other bidders values (bids) are. The bid you write down is the price you will pay in the event you are the highest bidder.
Second Price, Sealed Bid This type of bid is exactly like the first priced, sealed bid except in that the highest bidder is only expected to pay what the second highest bidders bid was for the item being bid upon.
Dutch Auction (descending bid) With a dutch action, the seller actually starts the bidding with an exorbitantly large dollar amount and the auctioneer begins lowering the price slowly until a bidder is actually willing to pay that price. The textbook states that this type of bidding is largely used in the Netherlands (hence the name) to auction off tulips. In this type of auction, bids are confidential and you do not know any information about the other bidders.
In an article entitled "The Simple Economics of Optimal Auctions", authors Bulow and Roberts state "An optimal auction is a bidding mechanism designed to maximize a seller's expected profit." So, while the investment firm has the very important role of choosing the most profitable auction type, the potential buyer also has an important role in the process. A potential buyers most important role when participating in an auction is conducting the appropriate amount of due diligence. Each bidder should evaluate the firm being bid on and determine it's value. Many factors go into this such as the current state of the company (bankruptcy, etc), knowledge, patents, FF&E, etc.This in itself can be challenging and when placing a bid you must also factor in what the other bidders values may be and adjust your bid if you deem necessary.There are 3 different types of valuations described below. (Baye, 2009)
Independent Private Values This is where the bidders know their own valuations of the item being bid on, but don't know what everyone else's valuations are. Also, your own valuation is not dependent on what the other bidders valuations are. Hence the bids are independent and private of one another.
Affiliated Value Estimates Each bidder uses their knowledge or information regarding the item being bid on to estimate the items value. The true value isn't known, but there is a likelihood that if one persons valuation is high, others will be high as well. Baye gives a example of a painting.
Common Value This is where an items true value is the same for everyone, but the common value is different. This means that personal preferences don't influence the value, but access and use to different types of true information does.
Depending on the type of auction and the bidders valuation of the item, different strategies will be used by the bidders to win the auction while spending the least amount of money. The most important thing to avoid when bidding during an auction is the "winners curse". Essentially, the "winners curse" states in an auction the winner tends to overpay and the value of the item they bid on is less than they anticipated and actually bid. Basically when an item goes up for bid several factors play into it. The actual value of the item is not known, personal preference is taken into account and the personal preferences of other bidders is not known. The item up for bid is valued independently by each bidder and can valued differently based on what they perceive to be the market value and their personal preference for an item.
Wikipedia states the term "winners curse" was coined in the 50's when company's were bidding on oil fields. At that time there wasn't a way to "accurately estimate the value of an oil field" and so a range of values was determined. Wikipedia gives an example that if an oil field was thought to have an actual value of $10 million then oil company's guessed the value to be between $5-$20 million and obviously the $20 million dollar bid would win but would have overpaid by $10 million and would later find out they paid way too much and be subject to the winners curse. Severity of the curse is heightened if there is more bidders.
To try and avoid the winners curse firms will determine what they think to be the value and bid below this amount.
Below is an example of an auction process for a company called Mediq Inc. This describes the process of what is believed to be an English style auction. There are several bidders, each knowing other bids and they continue bidding until the final round when no other bidders would increase their bid. The highest bidder was the acquiring firm.
Auction Process for Mediq Inc.
Date & Event
Oct. 17, ‘97 Company authorized Salomon Smith Barney to conduct an auction
Oct. 29, ’97 Press release: Salomon Smith Barney to explore strategic alternatives, including the possible sale of the Company.
Oct. 17 to 50 potential buyers contacted.
Nov. 17, ‘97 Confidentiality and standstill agreements with 39 potential buyers. Letter setting forth the procedures of the auction process, the deadline for firm offers and other bidding requirements sent to potential buyers.
Nov. 17, ‘97 20 written indications of interest had been received. Salomon Smith Barney to contact the six highest indications of interest.
Dec. 3, ‘97 The six potential buyers conducted extensive meetings with to Jan. 8, ‘ 98 members of the Company’s senior management, visited Company headquarters and had access to the Data Room.
Jan. 8, ’98 Company received written offers from 3 of the six second-round bidders.
Jan. 9, ’98 Board determined that the proposal from BRS was best offer. Board directed executive management, with assistance of advisors, to (i) commence negotiations with BRS, (ii) ascertain whether the second highest bidder would raise its bid, (iii) not hold discussion with the third bidder at that time.
Second highest bidder not willing to increase its bid.
Jan. 11, ‘98 BRS was asked to increase the value of its bid. Increased the cash portion of its bid.
Jan.14, 1998 Mediq Board voted unanimously to approve the Merger.
Jan 15, ’98 PR Newswire story on Lexis/Nexis: “Bruckmann, Rosser, Sherrill & Co., Inc. to Acquire Mediq Incorporated”
Jan 16, ’98 New York Times: “Mediq Agrees to Be Acquired for $526 Million”
Source: Corporate Restructuring and Corporate Auctions., July 2003, table 5.
References:
Baye, M. (2009). Managerial economics and business strategy. McGraw-Hill/Irwin.
Boone, A., & Mulherin, J. H. (2003). Corporate restructuring and corporate auctions. Manuscript submitted for publication, .
Bulow, J., & Roberts, J. (1989). The simple economics of optimal auctions. The Journal Of Political Economy, 97(5), 1060-1090.
1. Which of the following auction mechanisms is NOT correct? a. Dutch b. English c. First priced, Open Bid d. First Priced, Sealed Bid e. Second Price, Sealed Bid
Answer: c, There is no auction mechanism called First Priced, Open Bid.
2. True or False. You know other bidders bids during an English Style Auction.
Answer: True. During an English style auction other bidders bids are known and bidding stops when there are no other higher bids.
3. The paper lists the folllowing quote: "An optimal auction is a bidding mechanism designed to maximize a seller's expected _." a. happiness b. cash c. profit
Answer: c
4. Fill in the blank. When an auction winner tends to overpay and the value of the item they bid on is actually less than they anticipated and actually bid, this is known as _.
Answer: Winners Curse.
5. is where the bidders know their own valuations of the item being bid on, but don't know what everyone else's valuations are. a. Common Value b. Independent Private Values c. Affiliated Value Estimates
Answer: b, Independent Private Values only know there own bids and not the bids of others. Your own bid is also not dependent on other peoples bids.
The original assignment was to create and answer a case study similar to Memo 10 (Time Warner):
NEW YORK, Aug 31 (Reuters) - U.S. auto parts supplier Cooper Standard (COSH.OB) is looking for a buyer more than a year after emerging from bankruptcy and has hired bankers to advise on the process, people familiar with the matter said.
Cooper Standard, which came out of bankruptcy in May of 2010 under the control of a handful of hedge funds, including Silver Point Capital and Oak Hill Advisors, has an enterprise value of more than $1.1 billion, according to Reuters data.
The Novi, Michigan-based company, which makes body sealing systems and fluid handling systems for the automotive industry, has attracted initial interest mostly from private equity firms, these people said. JPMorgan Chase (JPM.N) and Lazard Ltd (LAZ.N) are running the sale, according to the people.
Cooper Standard was formed in 2004 when New York-based private equity firm the Cypress Group and Goldman Sachs Capital Partners acquired the automotive segment of Cooper Tire & Rubber Co (CTB.N) for nearly $1.2 billion.
The company had grown through several acquisitions, but filed for Chapter 11 bankruptcy protection in 2009 when auto sales plunged to decade lows amid the global recession. Ford Motor Co (F.N) and General Motors Co (GM.N) are its two largest customers.
Interested parties have put in initial indications for Cooper Standard, with the second round likely to start in mid-September after Labor Day, one of the sources said.
Shares of Cooper Standard, which trades over the counter in a small volume, rose more than 15 percent to $49 on Wednesday.
Another U.S. auto parts supplier that competes with Cooper Standard in the fluid system segment, TI Automotive, is also on the auction block, people familiar with the matter told Reuters previously. [ID:nN1E75K211] TI Automotive's enterprise value is seen in the range of $1.4 billion to $1.6 billion, the people said at that time.
A number of formerly bankrupt auto industry assets, now owned by hedge funds or distressed investors, have gone on the auction block or tapped markets for an initial public offering this year as vehicle sales recover from the recession lows.
Cooper Standard's first-half revenue rose 18 percent to $1.45 billion from the same period last year, while its adjusted earnings before interest, tax, depreciation and amortization (EBITDA) rose 23 percent to $182 million from a year ago. It employs about 21,000 people globally and operates in 19 countries around the world.
TI Automotive and Cooper Standard are the world's two largest suppliers of systems that control, sense and deliver fluids and vapors in vehicles. But TI has greater exposure to the fast-growing Asian market, drawing roughly a quarter of its revenue from China and other Asian markets.
In comparison, Cooper Standard generated 8 percent of its revenue from Asia Pacific last year, while North America and Europe accounted for 86 percent of its sales.
Representatives for Cooper Standard did not immediately return calls for a comment. JPMorgan and Lazard declined to comment.
Answer:
As stated in the above press release Cooper Standard is seeking other firms to bid and acquire their firm. They are doing this via JP Morgan and Lazard, LTD are in charge of the bidding process and sale. The English style auction would generate the most profit for Cooper Standard. Cooper Standard is a automotive company that manufactures body sealing and fluid handling systems for major car manufacturers. The potential acquirers bidding on this form will have affiliated values due to the nature of the business that Cooper Standard is involved in. As stated in the paper above the English style auction allows bidders to know what each other is bidding and can generate higher bids due to the firms using Common Values.
FINAL PAPER ENDS HERE
SUMMARIES OF 5 OTHER PAPERS:
#1 - Using regression analysis.... by Anya Devoss
This paper begins by defining regression analysis as : a statistical technique used to find relationships between variables in order to predict future values." The paper goes on to talk about econometrics and how regression analysis came from econometrics. The paper explains t-stats (accept or reject a hypothesis), r squared as a goodness of fit and goes on to explain f stats and adjusted r squared as well. The author explains what each of the numbers mean and what you should be looking for. This paper also gives a regression analysis example.
#2- Elasticity by Anqi Fang
This paper starts by defining elasticity as " something that is highly responsive to changes in something else". The paper goes on to explain how elasticity is used and talks about what the sign (pos or neg) and the actual numbers mean. The paper discusses price elasticity is supply and demand, marginal revenue, income elasticity and cross price elasticity.
#3- Comparative Advantage and Trade by Regina Gauger
This paper starts by defining comparative advantage as "2 countries gain from trade if in the absence of trade, they have different relative costs for producing the same goods." The paper goes on to give examples of comparative advantage and how to determine whether or not you have a comparative advantage.
#4 Input Markets by Kreg Hunter
This paper starts out by discussing the labor supply and defines it as "the amount of hours that the labor market is willing to work." The paper then goes onto explain the labor demand and defines it as "the amount of labor supply that is demanded by an employer." The paper then talks about equilibrium in the labor market, marginal revenue and product of labor. It then goes on to explain the 3 main methods of input procurement. Those are spot exchange, contract and vertical integration and explains each of these.
#5 Monopoly by Amy Kitzman
This paper starts by defining a monopoly as "a market structure in which one single firm serves the entire market, where there are no close substitutes." The paper states there are 4 sources that create monopoly power. Those are: 1) economies of scale 2) economies of scope 3) cost complementary 4) patents and other legal barriers.
The paper then goes on to talk about how to prevent monopolies and gives example of monopolies.
Information-
Memo 10 To: President, Global Operations From: COO Re: AOL Europe
As you know some of your colleagues have privately recommended that we sell our holdings in AOL Europe. Wile I have yet to form an opinion on this matter, an important issue is how such a deal might be put together. In particular, if we move in this direction, how do you envision selling these assets- individually or in one big deal?
Week of September 26, 2011-
Baye answered the case study is as follows:
Time Warner Solution to MEMO 10: AOL Europe
In determining the optimal mechanism to sell off the units of AOL Europe, it is important
to recognize that, ignoring the existing network size of potential acquirers, they are likely
to have affiliated values. To avoid the winner's curse, acquirers for the various parts of
AOL Europe will shade their bids below their private value estimates. Recognizing this
under the assumption that potential acquirers are also risk neutral, the optimal auction
format - the auction style that will generate the highest revenue - for the sale of AOL
Europe is an English-style auction. That is, there must be a way for acquirers to publicly
announce bids - such as the media - so that rival acquirers can learn about their values.
If it is believed that acquires values are affiliated, there is no extra value to bundling the
units within AOL Europe together. While values across acquirers' will have different
values across units, within each unit acquirers will have the same value.
When potential acquirers have different network sizes, positive network externalities
exist. This suggests that acquirers will have independent private values for the units of
AOL Europe. Under this assumption along with the assumption of risk-neutral bidders,
the expected revenues are identical for each of the auction types.
When acquirers have independent private values stemming from possible network
externalities, the units of AOL Europe should be sold has a bundle. This is justified since
acquirers values vary within and across the various AOL Europe units. Time Warner can
exploit these differences using commodity bundling.
Some background info:
Chapter 12 of the text deals with various types of auctions. The text states that in an auction, potential buyers
compete for the right to own a good, service or more generally anything of value. I think of EBay when I think of
an auction.Baye in the above solution says that to the potential buyers will have "affiliated values". This means
that each of the bidders don't have an equal amount of value for whatever they are bidding on but share something
in common with each other in regards to that value. Baye says to avoid the "winners curse" (basically the winner
overbids and spends too much money), each of the bidders will bid below what they actually perceive as their value.
Baye also states that the bidders will be risk neutral meaning they aren't risk adverse or heavy risk takers. Baye
states considering all of these things that the best way for AOL Europe to make the most money is in an English
style auction. Baye talks about not bundling AOL Europe together because each unit is not the same and different
bidders will find different amounts of value amongst the various units, but that the bidders within each unit will share
a similar value with one another. When I thought about this - I thought of a junk yard type setting where I could
sell whole cars to people (and likely make less because people don't really want the whole car and hassle of it will
decrease the value) or I could sell off the individual pieces of the car to individual people who are specifically looking
for that part and in turn making much more money because more parts are being sold and each part creates a value for
the individual purchaser without the hassle of purchasing the entire car. Baye also talks about bundling the various units
if the bidders have "independent private values stemming from possible network externalities."
Week of October 3, 2011-
This powerpoint was found to be very helpful with describing the types of values of the winners curse:
myweb.fsu.edu/djcooper/teaching/kagellevin.ppt
Week of October 10, 2011:
This week I will talk about auction types. Chapter 12 of the text talks about the types of auctions that firms can choose to use.There are 4 types of auctions each offering a different style. The four types that the text talks about are:
1. English auction
2. First price, sealed bid
3. Second price, sealed bid
4. Dutch auction
The English auction is what I traditionally think of when I think of an auction- it is like going to a car auction. Goods are bid on and sold to the highest bidder. When bidding, you can see what the last bid was and bid higher if you think its worth more than the previous bid.
The first price, sealed bid is where bidders write their bids on a piece of paper and don't know what anyone else has bid. Just like the english auction the highest bidder wins. I think of silent auctions.
The second price, sealed bid is like the first price, sealed bid in that you don't know the bid prices of the other bidders. The difference is that while the highest bidder wins, he only pays the amount that was bid by the second highest bidder.
The Dutch auction is where the firm sets an unreasonable price for an item and slowly lowers the price until someone will pay it. The first person to offer up the price is the winner. It is basically the opposite of the English auction.
Week of October 17, 2011:
This week I will go into more detail on how the English auction works seeing as this was the action type thought to be the best type in the solution to the memo.
The English style auction is much like the auctions you see on TV shows or at car auctions and similar to ebay auctions without set reserve prices. The auction is started with an opening bid and an auctioneer starts the bidding process which continues until there are no more persons willing to pay a higher price. The winner is the highest bidder and pays their final bid price. When bidding, each bidder knows the other bids and will continue to bid until they feel the item is valued higher than the current bid.
This week I will talk about winners curse and what is means.
Essentially, the "winners curse" states in an auction the winner tends to overpay and the value of the item they bid on is less than they anticipated and actually bid. Basically when an item goes up for bid several factors play into it. The actual value of the item is not known, personal preference is taken into account and the personal preferences of other bidders is not known. The item up for bid is value independently by each person bidding and can valued differently based on what they perceive to be the market value and their personal preference for an item.
Wikipedia states the term "winners curse" was coined in the 50's when company's were bidding on oil fields. At that time there wasn't a way to "accurately estimate the value of an oil field" and so a range of values was determined. Wikipedia gives an example that if an oil field was thought to have an actual value of $10 million then oil company's guessed the value to be between $5-$20 million and obviously the $20 million dollar bid would win but would have overpaid by $10 million and would later find out they paid way too much and be subject to the winners curse. Severity of the curse is heightened if there is more bidders.
To try and avoid the winners curse firms will determine what they think to be the value and bid below this amount.
FINAL PAPER
Kelli Schoon-Saxsma
December 07, 2011
Optimal Auctioning Mechanisms
Often times, company's will need to sell off all or part of their firms in order to either liquidate or survive. This is done via utilizing auctioning mechanisms. There are several options company's have regarding the type of auctioning method to use. This paper will discuss each method and its benefits and/or risks involved.
Generally, when a company is looking for a buyer, they will announce that they are seeking a buyer or exploring their options. In many of the cases researched firms hire an investment company or a firm with specific knowledge of the auctioning process to handle the actual action and sale. In the announcement there will be a statement of which firm was selected to handle the exploration of the company's options in how it will proceed. (Boone & Mulherin, 2003) The auction process then moves forward, which is what the rest of the paper will focus on.
In the auction process buyers are competing with one another to become the new owner of the firm or piece of firm being sold. The investment firm hired to handle the same will determine the type of auction best suitable for generating the highest bid, thereby getting the most money out of the potential buyer. The text states that in an auction, potential buyers compete for the right to own a good, service or more generally anything of value. Also stated, is there are four main types of auctioning mechanisms used that are described below.(Baye, 2009)
English Auction (ascending bid)
The English auction is what is traditionally thought of when relating to an auction. Examples of this type of auction would be a car/equipment auction, antiques auction, livestock auction or an EBay auction. Goods are bid on and sold to the highest bidder. When bidding, you can see what the last bid was and bid higher if you think its worth more than the previous bid. This type of bidding will continue until no higher bids are placed or until time runs out.
First Priced, Sealed Bid
The first price, sealed bid is where bidders write their bids on a piece of paper and are unaware of the other bidders bids. Just like the English auction the highest bidder wins. Most individuals equate this with silent auctions like those conducted at charity events. You are shown an item and use your best judgement as to the value and write down your value without knowing what other bidders values (bids) are. The bid you write down is the price you will pay in the event you are the highest bidder.
Second Price, Sealed Bid
This type of bid is exactly like the first priced, sealed bid except in that the highest bidder is only expected to pay what the second highest bidders bid was for the item being bid upon.
Dutch Auction (descending bid)
With a dutch action, the seller actually starts the bidding with an exorbitantly large dollar amount and the auctioneer begins lowering the price slowly until a bidder is actually willing to pay that price. The textbook states that this type of bidding is largely used in the Netherlands (hence the name) to auction off tulips. In this type of auction, bids are confidential and you do not know any information about the other bidders.
In an article entitled "The Simple Economics of Optimal Auctions", authors Bulow and Roberts state "An optimal auction is a bidding mechanism designed to maximize a seller's expected profit." So, while the investment firm has the very important role of choosing the most profitable auction type, the potential buyer also has an important role in the process. A potential buyers most important role when participating in an auction is conducting the appropriate amount of due diligence. Each bidder should evaluate the firm being bid on and determine it's value. Many factors go into this such as the current state of the company (bankruptcy, etc), knowledge, patents, FF&E, etc.This in itself can be challenging and when placing a bid you must also factor in what the other bidders values may be and adjust your bid if you deem necessary.There are 3 different types of valuations described below. (Baye, 2009)
Independent Private Values
This is where the bidders know their own valuations of the item being bid on, but don't know what everyone else's valuations are. Also, your own valuation is not dependent on what the other bidders valuations are. Hence the bids are independent and private of one another.
Affiliated Value Estimates
Each bidder uses their knowledge or information regarding the item being bid on to estimate the items value. The true value isn't known, but there is a likelihood that if one persons valuation is high, others will be high as well. Baye gives a example of a painting.
Common Value
This is where an items true value is the same for everyone, but the common value is different. This means that personal preferences don't influence the value, but access and use to different types of true information does.
Depending on the type of auction and the bidders valuation of the item, different strategies will be used by the bidders to win the auction while spending the least amount of money. The most important thing to avoid when bidding during an auction is the "winners curse". Essentially, the "winners curse" states in an auction the winner tends to overpay and the value of the item they bid on is less than they anticipated and actually bid. Basically when an item goes up for bid several factors play into it. The actual value of the item is not known, personal preference is taken into account and the personal preferences of other bidders is not known. The item up for bid is valued independently by each bidder and can valued differently based on what they perceive to be the market value and their personal preference for an item.
Wikipedia states the term "winners curse" was coined in the 50's when company's were bidding on oil fields. At that time there wasn't a way to "accurately estimate the value of an oil field" and so a range of values was determined. Wikipedia gives an example that if an oil field was thought to have an actual value of $10 million then oil company's guessed the value to be between $5-$20 million and obviously the $20 million dollar bid would win but would have overpaid by $10 million and would later find out they paid way too much and be subject to the winners curse. Severity of the curse is heightened if there is more bidders.
To try and avoid the winners curse firms will determine what they think to be the value and bid below this amount.
Below is an example of an auction process for a company called Mediq Inc. This describes the process of what is believed to be an English style auction. There are several bidders, each knowing other bids and they continue bidding until the final round when no other bidders would increase their bid. The highest bidder was the acquiring firm.
Auction Process for Mediq Inc.
Date & Event
Oct. 17, ‘97 Company authorized Salomon Smith Barney to conduct an auction
Oct. 29, ’97 Press release: Salomon Smith Barney to explore strategic alternatives, including the possible sale of the Company.
Oct. 17 to 50 potential buyers contacted.
Nov. 17, ‘97 Confidentiality and standstill agreements with 39 potential buyers. Letter setting forth the procedures of the auction process, the deadline for firm offers and other bidding requirements sent to potential buyers.
Nov. 17, ‘97 20 written indications of interest had been received.
Salomon Smith Barney to contact the six highest indications of interest.
Dec. 3, ‘97 The six potential buyers conducted extensive meetings with
to Jan. 8, ‘ 98 members of the Company’s senior management, visited Company headquarters and had access to the Data Room.
Jan. 8, ’98 Company received written offers from 3 of the six second-round bidders.
Jan. 9, ’98 Board determined that the proposal from BRS was best offer.
Board directed executive management, with assistance of advisors, to
(i) commence negotiations with BRS,
(ii) ascertain whether the second highest bidder would raise its bid,
(iii) not hold discussion with the third bidder at that time.
Second highest bidder not willing to increase its bid.
Jan. 11, ‘98 BRS was asked to increase the value of its bid.
Increased the cash portion of its bid.
Jan.14, 1998 Mediq Board voted unanimously to approve the Merger.
Jan 15, ’98 PR Newswire story on Lexis/Nexis:
“Bruckmann, Rosser, Sherrill & Co., Inc. to Acquire Mediq Incorporated”
Jan 16, ’98 New York Times: “Mediq Agrees to Be Acquired for $526 Million”
Source: Corporate Restructuring and Corporate Auctions., July 2003, table 5.
References:
Baye, M. (2009). Managerial economics and business strategy. McGraw-Hill/Irwin.
Boone, A., & Mulherin, J. H. (2003). Corporate restructuring and corporate auctions. Manuscript submitted for publication, .
Bulow, J., & Roberts, J. (1989). The simple economics of optimal auctions. The Journal Of Political Economy, 97(5), 1060-1090.
Winners curse. (2011, December 5). Retrieved from http://en.wikipedia.org/wiki/Winner's_curse
Quiz Questions:
1. Which of the following auction mechanisms is NOT correct?
a. Dutch
b. English
c. First priced, Open Bid
d. First Priced, Sealed Bid
e. Second Price, Sealed Bid
Answer: c, There is no auction mechanism called First Priced, Open Bid.
2. True or False. You know other bidders bids during an English Style Auction.
Answer: True. During an English style auction other bidders bids are known and bidding stops when there are no other higher bids.
3. The paper lists the folllowing quote: "An optimal auction is a bidding mechanism designed to maximize a seller's expected _."
a. happiness
b. cash
c. profit
Answer: c
4. Fill in the blank. When an auction winner tends to overpay and the value of the item they bid on is actually less than they anticipated and actually bid, this is known as _.
Answer: Winners Curse.
5. is where the bidders know their own valuations of the item being bid on, but don't know what everyone else's valuations are.
a. Common Value
b. Independent Private Values
c. Affiliated Value Estimates
Answer: b, Independent Private Values only know there own bids and not the bids of others. Your own bid is also not dependent on other peoples bids.
The original assignment was to create and answer a case study similar to Memo 10 (Time Warner):
Case:
As reported by Reuters on August 31st.
Cooper Standard looking for a buyer -- sources
By Soyoung Kim and Caroline HumerNEW YORK, Aug 31 (Reuters) - U.S. auto parts supplier Cooper Standard (COSH.OB) is looking for a buyer more than a year after emerging from bankruptcy and has hired bankers to advise on the process, people familiar with the matter said.
Cooper Standard, which came out of bankruptcy in May of 2010 under the control of a handful of hedge funds, including Silver Point Capital and Oak Hill Advisors, has an enterprise value of more than $1.1 billion, according to Reuters data.
The Novi, Michigan-based company, which makes body sealing systems and fluid handling systems for the automotive industry, has attracted initial interest mostly from private equity firms, these people said. JPMorgan Chase (JPM.N) and Lazard Ltd (LAZ.N) are running the sale, according to the people.
Cooper Standard was formed in 2004 when New York-based private equity firm the Cypress Group and Goldman Sachs Capital Partners acquired the automotive segment of Cooper Tire & Rubber Co (CTB.N) for nearly $1.2 billion.
The company had grown through several acquisitions, but filed for Chapter 11 bankruptcy protection in 2009 when auto sales plunged to decade lows amid the global recession. Ford Motor Co (F.N) and General Motors Co (GM.N) are its two largest customers.
Interested parties have put in initial indications for Cooper Standard, with the second round likely to start in mid-September after Labor Day, one of the sources said.
Shares of Cooper Standard, which trades over the counter in a small volume, rose more than 15 percent to $49 on Wednesday.
Another U.S. auto parts supplier that competes with Cooper Standard in the fluid system segment, TI Automotive, is also on the auction block, people familiar with the matter told Reuters previously. [ID:nN1E75K211] TI Automotive's enterprise value is seen in the range of $1.4 billion to $1.6 billion, the people said at that time.
A number of formerly bankrupt auto industry assets, now owned by hedge funds or distressed investors, have gone on the auction block or tapped markets for an initial public offering this year as vehicle sales recover from the recession lows.
Cooper Standard's first-half revenue rose 18 percent to $1.45 billion from the same period last year, while its adjusted earnings before interest, tax, depreciation and amortization (EBITDA) rose 23 percent to $182 million from a year ago. It employs about 21,000 people globally and operates in 19 countries around the world.
TI Automotive and Cooper Standard are the world's two largest suppliers of systems that control, sense and deliver fluids and vapors in vehicles. But TI has greater exposure to the fast-growing Asian market, drawing roughly a quarter of its revenue from China and other Asian markets.
In comparison, Cooper Standard generated 8 percent of its revenue from Asia Pacific last year, while North America and Europe accounted for 86 percent of its sales.
Representatives for Cooper Standard did not immediately return calls for a comment. JPMorgan and Lazard declined to comment.
Answer:
As stated in the above press release Cooper Standard is seeking other firms to bid and acquire their firm. They are doing this via JP Morgan and Lazard, LTD are in charge of the bidding process and sale. The English style auction would generate the most profit for Cooper Standard. Cooper Standard is a automotive company that manufactures body sealing and fluid handling systems for major car manufacturers. The potential acquirers bidding on this form will have affiliated values due to the nature of the business that Cooper Standard is involved in. As stated in the paper above the English style auction allows bidders to know what each other is bidding and can generate higher bids due to the firms using Common Values.
FINAL PAPER ENDS HERE
SUMMARIES OF 5 OTHER PAPERS:
#1 - Using regression analysis.... by Anya Devoss
This paper begins by defining regression analysis as : a statistical technique used to find relationships between variables in order to predict future values." The paper goes on to talk about econometrics and how regression analysis came from econometrics. The paper explains t-stats (accept or reject a hypothesis), r squared as a goodness of fit and goes on to explain f stats and adjusted r squared as well. The author explains what each of the numbers mean and what you should be looking for. This paper also gives a regression analysis example.
#2- Elasticity by Anqi Fang
This paper starts by defining elasticity as " something that is highly responsive to changes in something else". The paper goes on to explain how elasticity is used and talks about what the sign (pos or neg) and the actual numbers mean. The paper discusses price elasticity is supply and demand, marginal revenue, income elasticity and cross price elasticity.
#3- Comparative Advantage and Trade by Regina Gauger
This paper starts by defining comparative advantage as "2 countries gain from trade if in the absence of trade, they have different relative costs for producing the same goods." The paper goes on to give examples of comparative advantage and how to determine whether or not you have a comparative advantage.
#4 Input Markets by Kreg Hunter
This paper starts out by discussing the labor supply and defines it as "the amount of hours that the labor market is willing to work." The paper then goes onto explain the labor demand and defines it as "the amount of labor supply that is demanded by an employer." The paper then talks about equilibrium in the labor market, marginal revenue and product of labor. It then goes on to explain the 3 main methods of input procurement. Those are spot exchange, contract and vertical integration and explains each of these.
#5 Monopoly by Amy Kitzman
This paper starts by defining a monopoly as "a market structure in which one single firm serves the entire market, where there are no close substitutes." The paper states there are 4 sources that create monopoly power. Those are: 1) economies of scale 2) economies of scope 3) cost complementary 4) patents and other legal barriers.
The paper then goes on to talk about how to prevent monopolies and gives example of monopolies.
Information-
Memo 10
To: President, Global Operations
From: COO
Re: AOL Europe
As you know some of your colleagues have privately recommended
that we sell our holdings in AOL Europe. Wile I have yet to form an
opinion on this matter, an important issue is how such a deal might
be put together. In particular, if we move in this direction, how do
you envision selling these assets- individually or in one big deal?
Week of September 26, 2011-
Baye answered the case study is as follows:
Time Warner Solution to MEMO 10: AOL Europe
In determining the optimal mechanism to sell off the units of AOL Europe, it is important
to recognize that, ignoring the existing network size of potential acquirers, they are likely
to have affiliated values. To avoid the winner's curse, acquirers for the various parts of
AOL Europe will shade their bids below their private value estimates. Recognizing this
under the assumption that potential acquirers are also risk neutral, the optimal auction
format - the auction style that will generate the highest revenue - for the sale of AOL
Europe is an English-style auction. That is, there must be a way for acquirers to publicly
announce bids - such as the media - so that rival acquirers can learn about their values.
If it is believed that acquires values are affiliated, there is no extra value to bundling the
units within AOL Europe together. While values across acquirers' will have different
values across units, within each unit acquirers will have the same value.
When potential acquirers have different network sizes, positive network externalities
exist. This suggests that acquirers will have independent private values for the units of
AOL Europe. Under this assumption along with the assumption of risk-neutral bidders,
the expected revenues are identical for each of the auction types.
When acquirers have independent private values stemming from possible network
externalities, the units of AOL Europe should be sold has a bundle. This is justified since
acquirers values vary within and across the various AOL Europe units. Time Warner can
exploit these differences using commodity bundling.
Some background info:
Chapter 12 of the text deals with various types of auctions. The text states that in an auction, potential buyers
compete for the right to own a good, service or more generally anything of value. I think of EBay when I think of
an auction.Baye in the above solution says that to the potential buyers will have "affiliated values". This means
that each of the bidders don't have an equal amount of value for whatever they are bidding on but share something
in common with each other in regards to that value. Baye says to avoid the "winners curse" (basically the winner
overbids and spends too much money), each of the bidders will bid below what they actually perceive as their value.
Baye also states that the bidders will be risk neutral meaning they aren't risk adverse or heavy risk takers. Baye
states considering all of these things that the best way for AOL Europe to make the most money is in an English
style auction. Baye talks about not bundling AOL Europe together because each unit is not the same and different
bidders will find different amounts of value amongst the various units, but that the bidders within each unit will share
a similar value with one another. When I thought about this - I thought of a junk yard type setting where I could
sell whole cars to people (and likely make less because people don't really want the whole car and hassle of it will
decrease the value) or I could sell off the individual pieces of the car to individual people who are specifically looking
for that part and in turn making much more money because more parts are being sold and each part creates a value for
the individual purchaser without the hassle of purchasing the entire car. Baye also talks about bundling the various units
if the bidders have "independent private values stemming from possible network externalities."
Week of October 3, 2011-
This powerpoint was found to be very helpful with describing the types of values of the winners curse:
myweb.fsu.edu/djcooper/teaching/kagellevin.ppt
Week of October 10, 2011:
This week I will talk about auction types. Chapter 12 of the text talks about the types of auctions that firms can choose to use.There are 4 types of auctions each offering a different style. The four types that the text talks about are:
1. English auction
2. First price, sealed bid
3. Second price, sealed bid
4. Dutch auction
The English auction is what I traditionally think of when I think of an auction- it is like going to a car auction. Goods are bid on and sold to the highest bidder. When bidding, you can see what the last bid was and bid higher if you think its worth more than the previous bid.
The first price, sealed bid is where bidders write their bids on a piece of paper and don't know what anyone else has bid. Just like the english auction the highest bidder wins. I think of silent auctions.
The second price, sealed bid is like the first price, sealed bid in that you don't know the bid prices of the other bidders. The difference is that while the highest bidder wins, he only pays the amount that was bid by the second highest bidder.
The Dutch auction is where the firm sets an unreasonable price for an item and slowly lowers the price until someone will pay it. The first person to offer up the price is the winner. It is basically the opposite of the English auction.
Week of October 17, 2011:
This week I will go into more detail on how the English auction works seeing as this was the action type thought to be the best type in the solution to the memo.
The English style auction is much like the auctions you see on TV shows or at car auctions and similar to ebay auctions without set reserve prices. The auction is started with an opening bid and an auctioneer starts the bidding process which continues until there are no more persons willing to pay a higher price. The winner is the highest bidder and pays their final bid price. When bidding, each bidder knows the other bids and will continue to bid until they feel the item is valued higher than the current bid.
Here is a wikipedia link for English auctions which offers good information:
http://en.wikipedia.org/wiki/English_auction
Week of October 24, 2011:
Kelli is on vacation this week
Week of October 31, 2011:
This week I will talk about winners curse and what is means.
Essentially, the "winners curse" states in an auction the winner tends to overpay and the value of the item they bid on is less than they anticipated and actually bid. Basically when an item goes up for bid several factors play into it. The actual value of the item is not known, personal preference is taken into account and the personal preferences of other bidders is not known. The item up for bid is value independently by each person bidding and can valued differently based on what they perceive to be the market value and their personal preference for an item.
Wikipedia states the term "winners curse" was coined in the 50's when company's were bidding on oil fields. At that time there wasn't a way to "accurately estimate the value of an oil field" and so a range of values was determined. Wikipedia gives an example that if an oil field was thought to have an actual value of $10 million then oil company's guessed the value to be between $5-$20 million and obviously the $20 million dollar bid would win but would have overpaid by $10 million and would later find out they paid way too much and be subject to the winners curse. Severity of the curse is heightened if there is more bidders.
To try and avoid the winners curse firms will determine what they think to be the value and bid below this amount.
http://en.wikipedia.org/wiki/Winner%27s_curse