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Strategic merger waves: A theory of musical chairs

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Author Info
Toxvaerd, Flavio

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Abstract

This paper proposes an explanation of merger waves based on the interaction between competitive pressure and irreversibility of mergers in an uncertain environment. A set of acquirers compete over time for scarce targets. At each point in time, an acquirer can either postpone a takeover attempt or raid immediately. By postponing the takeover attempt, an acquirer may gain from more favorable future market conditions, but runs the risk of being preempted by rivals. First, a complete information model is considered and it is shown that the above tradeoff leads to a continuum of subgame perfect equilibria in monotone strategies that are strictly Pareto ranked. All these equilibria share the feature that all acquirers rush simultaneously in merger waves. The model is then extended to a dynamic global game by introducing slightly noisy private information about merger profitability. This game is shown to have a unique Markov perfect Bayesian equilibrium in monotone strategies and the timing of the merger wave can thus be predicted. Last, the comparative dynamics predictions of the model are related to stylized facts.

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File URL: http://www.sciencedirect.com/science/article/B6WJ3-4P2J0F7-1/1/3b161e7e4f1266f4b15440758abd7394
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 140 (2008)
Issue (Month): 1 (May)
Pages: 1-26
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Handle: RePEc:eee:jetheo:v:140:y:2008:i:1:p:1-26

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  5. Flavio Toxvaerd, 2004. "Strategic Merger Waves: A Theory of Musical Chairs," Discussion Paper Series dp359, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem. [Downloadable!]
    Other versions:
  6. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Albert Banal-Estañol & Paul Heidhues & Rainer Nitsche & Jo Seldeslacht, 2006. "Merger Clusters during Economic Booms," City University Economics Discussion Papers 06/07, Department of Economics, City University, London. [Downloadable!]
    Other versions:
  2. Song, Moon H. & Walkling, Ralph A., 2004. "Anticipation, Acquisitions and the Bidder Return Puzzle," Working Paper Series 2004-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  3. Flavio Toxvaerd, 2005. "Record Breaking and Temporal Clustering," Discussion Paper Series dp395, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem. [Downloadable!]
  4. Flavio Toxvaerd & Chryssi Giannitsarou, 2004. "Recursive global games," Money Macro and Finance (MMF) Research Group Conference 2003 104, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  5. Cabral, Luís M B, 2003. "An Equilibrium Approach to International Merger Policy," CEPR Discussion Papers 3878, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Toxvaerd, Flavio, 2007. "Strategic Merger Waves: A Theory of Musical Chairs," CEPR Discussion Papers 6159, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Johan Stennek, 2006. "A new perspective on mergers and acquisitions: Evidence explained, policies prescribed," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 7(1), pages 3-8, 04. [Downloadable!]
  8. Mathevet, Laurent, . "A contraction principle for finite global games," Working Papers 1243, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  9. Charles van Marrewijk & Gus Garita, 2008. "Countries of a Feather flock together," Tinbergen Institute Discussion Papers 08-067/2, Tinbergen Institute, revised 19 Sep 2008. [Downloadable!]
  10. Gary Gorton & Matthias Kahl & Richard Rosen, 2005. "Eat or Be Eaten: A Theory of Mergers and Merger Waves," NBER Working Papers 11364, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Albert Banal-Estanol & Paul Heidhues & Rainer Nitsche & Jo Seldeslachts, 2009. "Screening and Merger Activity," Discussion Papers 270, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  12. Jakub Steiner, 2006. "Coordination Cycles," ESE Discussion Papers 162, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
    Other versions:
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