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A pre-emption model of mergers

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  • Baomin Dong
  • Frank Wang

Abstract

This paper studies the paradox of the value destroying mergers in a sequential negotiation model in which the synergy accrued from the mergers is private information. This study shows that in a simultaneous competitive bidding process, the winner’s curse of overpaying rarely occurs but may arise in the target firm initiated sequential negotiations; and if the merger is successful then the outcome is never value destroying for the combined firm. Thus the acquirer’s overpayment cannot be considered as the ‘winner’s curse’ that results from the post-announcement competitive bidding but rather than the result of the target’s strengthened bargaining power in the sequential negotiations. The implications and intuition of such value-destroying mergers thus differ substantially from that of existing pre-emptive mergers and acquisitions models that use a simultaneous bidding mechanism. The results also imply that the ‘acquisition premium’ accrues to the target firms. Copyright Springer-Verlag Wien 2014

Suggested Citation

  • Baomin Dong & Frank Wang, 2014. "A pre-emption model of mergers," Journal of Economics, Springer, vol. 113(2), pages 187-204, October.
    • Handle: RePEc:kap:jeczfn:v:113:y:2014:i:2:p:187-204
    DOI: 10.1007/s00712-013-0379-8
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    Cited by:

    1. Pu†yan Nie, 2018. "Comparing Horizontal Mergers Under Cournot with Bertrand Competitions," Australian Economic Papers, Wiley Blackwell, vol. 57(1), pages 55-80, March.

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    More about this item

    Keywords

    Value destroying M&As; Pre-emption; Overpaying; L12; L13;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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