Auctions of Shares with a Secondary Market and Tender Offers

The method of sale of a corporation's shares has important effects on its value and future performance. The market for shares is composed of both small investors purchasing shares for portfolio reasons and large investors with an interest in obtaining control. This inherent asymmetry is critical in the design of an optimal method of sale. Should the sale disperse the shares and let interested shareholders assemble a controlling bloc in the secondary market, or alternatively should the sale reserve and transfer directly control of the shares? This paper analyses alternative methods of the sale of shares, taking into account the opportunities created by the existence of a secondary market including a tender offer market for the shares. With private as well as public benefits from ownership, we show how competition among different investors determines the optimal method of sale. The paper provides guidelines for the design of sales in privatizations and in initial public offers and makes clear the importance of setting the right ownership structure for the firm.