Rajkamal Vasu

Research

Research Interests

• Corporate Finance
• Mergers & Acquisitions
• Mechanism Design
• Contract Theory
• Economic History
• Economics of Innovation

 

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Working Papers

Auctions or Negotiations? A Theory of How Firms are Sold

Abstract: An owner of a firm is selling the firm. Potential buyers do not know how many other potential buyers there are. Will the seller choose to sell the firm through bilateral negotiations or through an auction? In equilibrium, if the seller observes the number of buyers before choosing the mechanism, the choice can signal information and lower expected revenue. Broadly speaking, the seller chooses an auction if the expected number of buyers is high and negotiations otherwise. Empirical implications of the theory are (i) The revenue is higher if buyer valuations are less volatile; (ii) More risk-averse sellers choose auctions more often; (iii) If the seller risk-aversion is above (below) a threshold value, the average transaction price in auctions is greater (less) than that in negotiations. Committing to a mechanism before seeing the number of buyers increases the seller's revenue.

 

Optimal M&A Advisory Contracts

Abstract: Consider a scenario where a firm is in negotiations with a potential buyer. Both the buyer and the seller are uninformed about the value of synergies, but they can hire an M&A Advisor. Suppose, though, that the seller and buyer face a moral hazard problem. If the advisor's effort is not observable, he has the option of not exerting effort and reporting any of the possible values. Should the seller and buyer hire an advisor and what is the optimal contract that they should sign with him? We find that the probabilities with which the buyer and seller hire their advisors and the optimal contracts are determined simultaneously in equilibrium. Both contracts depend on two variables- whether the transaction succeeds or not and, if it does, the value of the transaction. The seller's optimal contract with his advisor is unique, but the buyer's optimal contract can take a variety of forms. The compensation of the seller's advisor is monotonically increasing in the transaction value. Neither advisor is paid if the transaction fails. In equilibrium, both advisors exert effort, report truthfully and do not extract any information rents. However, the first best is not obtained because the transaction can fail even though it is socially optimal.

 

Product Market Relatedness, Antitrust and Merger Decisions, with Kirti Sinha

Abstract: We study how merger decisions between public firms in the US are affected by the similarity between the product markets of the acquirer and the potential target. The relation between the likelihood of the merger and the product market similarity is non-monotonic, in the shape of an inverted U. We offer two reasons for this finding. First, when the product markets are very similar, there is a high chance that antitrust investigations will block the merger. We find that this effect is stronger in markets that are more concentrated and in years where antitrust regulatory intensity is high. Second, the synergies from the merger are less if the product markets are very related. Hence, firms are more likely to acquire targets with which they have a medium rather than a high level of product market similarity.

 

The Transition to Locked-In Capital in the First Corporations: Venture Capital Financing in Early Modern Europe

Abstract: Capital lock-in is the legal feature of a modern corporation which prevents the equity investors from forcing the firm to return their capital. Why did it emerge for the first time in the Dutch East India Company before it did in England? To answer this question, I develop a model in which equity investors choose the duration for which their capital is pledged to the firm. The duration depends on three factors, namely the incentive of the managers to divert capital from the firm, the uncertainty about the productivity of the technology used by the firm and the probability of expropriation of capital by the state. I argue that capital lock-in was first adopted in the Dutch East India Company because there was less uncertainty regarding the productivity of intercontinental trade in the Netherlands compared to England. I show that the uncertainty about innovative technologies affects the adoption of capital lock-in even today, for example in the venture capital and private equity industries.

 

Valuation of Private Innovative Targets, with Chandra Sekhar Mangipudi and Krishnamurthy V. Subramanian

Abstract: Despite the growing importance of acquisitions of private targets by incumbent technology firms and the need to value the intangible assets acquired in these business combinations, studies on the valuation of such assets are scarce. We use Cisco’s acquisitions from 1993-2012 to explore how to value the intangible assets of private, innovative targets. We use Cisco’s acquisitions because it is a large, dominant technology firm that grew primarily through acquisitions. Apart from unobserved demand and supply factors, we control for acquirer’s and target’s over- or under-valuation and deal synergies. We estimate that targets receive $81 million ($144 million) for every patent filed (granted) at the time of acquisition. Novel innovations are more valued: each citation to the target’s patents increases value by $6.1 million. Targets receive $2.22 million per employee. However, estimates obtained using publicly listed innovative firms do not provide reliable proxies to value intangible assets of private targets.

 

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Work in Progress

Lemons Problems and Intangible Assets: Evidence from Early 20th Century Illinois, with Huseyin Cagri Akkoyun and Michael Andrews