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Takeover Timing, Implementation Uncertainty, and Embedded Divestment Options

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  • Luis Alvarez
  • Rune Stenbacka

Abstract

We design a compound real options model, which determines the timing of takeovers and characterizes the distribution of the associated surplus. We delineate a relation between the bargaining power of the acquiring firm and the takeover incentives. The takeover threshold is decreasing as a function of the expected primary takeover gain and the embedded divestment gain. Decreased implementation uncertainty stimulates takeover activity. This uncertainty concerns the delay until either primary takeover synergies or subsequent divestment gains are realized. We demonstrate how the relation between volatility and takeover timing depends on the functional form of the profit flow with implementation uncertainty. Copyright Oxford University Press 2006

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File URL: http://hdl.handle.net/10.1007/s10679-006-9002-y
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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 10 (2006)
Issue (Month): 3 (September)
Pages: 417-441

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Handle: RePEc:oup:revfin:v:10:y:2006:i:3:p:417-441

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Cited by:
  1. Flavio Toxvaerd, 2004. "Strategic Merger Waves: A Theory of Musical Chairs," Discussion Paper Series dp359, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  2. S. Rosenkranz & G.U. Weitzel, 2007. "Bargaining in Mergers and Termination Fees," Working Papers 07-06, Utrecht School of Economics.
  3. Lukas, Elmar & Welling, Andreas, 2012. "Negotiating M&As under uncertainty: The influence of managerial flexibility on the first-mover advantage," Finance Research Letters, Elsevier, vol. 9(1), pages 29-35.
  4. Thijssen, Jacco J.J., 2008. "Optimal and strategic timing of mergers and acquisitions motivated by synergies and risk diversification," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1701-1720, May.

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