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Merger Mechanisms

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  • Sandro Brusco
  • Giuseppe Lopomo
  • S Viswanathan

Abstract

A firm can merge with one of n potential partners. The owner of each firm has private information about both his firm's stand-alone value and a component of the synergies that would be realized by the merger involving his firm. We characterize incentive-efficient mechanisms in two cases. First, we assume that the value of any newly formed partnership is verifiable, hence transfers can be made contingent on the new information accruing after the merger. Second, we study the case of uncontingent rules. In the first case, we show that it is not optimal, in general, to redistribute shares of non-merging firms, and identify necessary and sufficient conditions for the implementability of efficient merger rules. In the second case, we show that the first-best can be obtained i) always, if the synergy values are privately known but the firms' stand-alone values are observable; ii) only with sufficiently large synergies, if the firms' stand-alone are privately known; and iii) never, if the set of feasible mechanisms is restricted to "auctions in shares"

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000379.

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Date of creation: 01 Sep 2004
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Handle: RePEc:cla:levrem:122247000000000379

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  1. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Jehiel, Phillipe & Moldovanu, Benny, 1999. "Efficient Design with Interdependent Valuations," Sonderforschungsbereich 504 Publications, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim 99-74, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  3. Fieseler, Karsten & Kittsteiner, Thomas & Moldovanu, Benny, 2003. "Partnerships, lemons, and efficient trade," Journal of Economic Theory, Elsevier, Elsevier, vol. 113(2), pages 223-234, December.
  4. Samuelson, William, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 740-45, September.
  5. Makowski, L. & Mezzetti, C., 1989. "The Possibility Of Efficient Mechanisms For Trading In Indivisible Object," Papers, California Davis - Institute of Governmental Affairs 344, California Davis - Institute of Governmental Affairs.
  6. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, Econometric Society, vol. 52(4), pages 995-1005, July.
  7. Matthew Rhodes-Kropf & S. Viswanathan, 2004. "Market Valuation and Merger Waves," Journal of Finance, American Finance Association, American Finance Association, vol. 59(6), pages 2685-2718, December.
  8. Claudio Mezzetti, 2004. "Mechanism Design with Interdependent Valuations: Efficiency," Econometrica, Econometric Society, Econometric Society, vol. 72(5), pages 1617-1626, 09.
  9. Matthew Rhodes-Kropf & S. Viswanathan, 2005. "Financing Auction Bids," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 789-815, Winter.
  10. Matthew Rhodes-Kropf & S. Viswanathan, 2000. "Corporate Reorganizations and Non-Cash Auctions," Journal of Finance, American Finance Association, American Finance Association, vol. 55(4), pages 1807-1854, 08.
  11. Andrzej Skrzypacz & Peter M. DeMarzo & Ilan Kremer, 2004. "Bidding with Securities: Auctions and Security Design," Econometric Society 2004 North American Winter Meetings 637, Econometric Society.
  12. Claudio Mezzetti, 2003. "Auction Design with Interdependent Valuations: The Generalized Revelation Principle, Efficiency, Full Surplus Extraction and Information Acquisition," Working Papers, Fondazione Eni Enrico Mattei 2003.21, Fondazione Eni Enrico Mattei.
  13. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information, EconWPA 9703010, EconWPA, revised 28 Apr 1998.
  14. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. repec:rje:randje:v:37:y:2006:1:p:1-22 is not listed on IDEAS
  16. Hansen, Robert G, 1987. "A Theory for the Choice of Exchange Medium in Mergers and Acquisitions," The Journal of Business, University of Chicago Press, vol. 60(1), pages 75-95, January.
  17. Cremer, Jacques, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 746, September.
  18. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1247-57, November.
  19. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, Econometric Society, vol. 60(2), pages 395-421, March.
  20. Hansen, Robert G, 1985. "Auctions with Contingent Payments," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 862-65, September.
  21. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, Econometric Society, vol. 66(4), pages 783-826, July.
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Cited by:
  1. Albert Banal-Estañol & Jo Seldeslachts, 2009. "Merger failures," Economics Working Papers 1192, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Jehiel, Philippe & Moldovanu, Benny, 2006. "Allocative and Informational Externalities in Auctions and Related Mechanisms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5558, C.E.P.R. Discussion Papers.

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