The inherent asymmetry in the market for shares caused by the presence both of investors purchasing for portfolio reasons and investors with an interest in obtaining control is critical in the design of an optimal method of sale. In Discussion Paper No. 1077, Research Fellow Antonio Mello and John Parsons analyse alternative methods for the sale of shares, taking account of the opportunities created by the existence of a secondary market for the shares including a tender offer market. The extreme alternatives considered in the paper are to transfer ownership of an indivisible bloc to large shareholders with an interest in taking control, or to disperse the shares and let interested parties assemble a controlling bloc in the secondary market.

The authors find that it is crucial that the method's ultimate design promotes the participation of potential large shareholders and that, at the same time, it makes their allocation and payment contingent on the demands of small investors. Therefore, they propose a mechanism which features an initial public offering of dispersed shares, followed by a sale of a controlling bloc in an auction with more than one potential large investor bidding. This auction should be under threat of a subsequent sale of dispersed shares in the event that the auction does not bring about a price contingent on the demand revealed during the initial stage of the sale.

Auctions of Shares with a Secondary Market and Tender Offers
Antonio Mello and John Parsons

Discussion Paper No. 1077, December 1994 (FE)