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Optimal and strategic timing of mergers and acquisitions motivated by synergies and risk diversification

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  • Thijssen, Jacco J.J.

Abstract

This paper analyses a real options model of mergers and takeovers between two firms experiencing different, but correlated, uncertainty. It is assumed that mergers do not just lead to efficiency gains, but are also an act of diversification. Due to the latter assumption the region where a merger is optimal is a bounded interval and not a half-space as in most real options models. It is shown that if the roles of the bidder and the target are determined endogenously the option value of the mergers vanishes completely, implying that, in equilibrium, the mergers occur sooner than when these roles are exogenously given. It is also shown that mergers can be optimal even if synergies are negative.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:dyncon:v:32:y:2008:i:5:p:1701-1720
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    3. Steg, Jan-Henrik & Thijssen, Jacco J.J., 2023. "Strategic investment with positive externalities," Games and Economic Behavior, Elsevier, vol. 138(C), pages 1-21.
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    5. Wang, Xunxiao & Wu, Chongfeng & Xu, Weidong, 2015. "When to buy or sell in supply chains with the presence of mergers," International Journal of Production Economics, Elsevier, vol. 163(C), pages 137-145.
    6. Tumellano Sebehela, 2017. "Game Options," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(03), pages 1-17, September.
    7. Guthrie, Graeme & Hobbs, Cameron, 2021. "How managerial ownership and the market for corporate control can improve investment timing," Journal of Banking & Finance, Elsevier, vol. 128(C).
    8. A. Mantovi, 2009. "Long run value stabilization in a real options perspective," Economics Department Working Papers 2009-EP01, Department of Economics, Parma University (Italy).
    9. Dirk Hackbarth & Bart Taub, 2022. "Does the Potential to Merge Reduce Competition?," Management Science, INFORMS, vol. 68(7), pages 5364-5383, July.
    10. Chi Man Leung & Yue Kuen Kwok, 2018. "Real options signaling game models for dynamic acquisition under information asymmetry," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(1), pages 35-63, May.
    11. Guthrie, Graeme, 2021. "A dynamic model of managerial entrenchment and the positive incentives it creates," Journal of Economic Dynamics and Control, Elsevier, vol. 123(C).
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    13. Lukas, Elmar & Pereira, Paulo J. & Rodrigues, Artur, 2023. "On the determinants of the dynamic choice between mergers and tender offers," Journal of Corporate Finance, Elsevier, vol. 83(C).
    14. Yanzhao Li & Ju'e Guo & Yongwu Li & Xu Zhang, 2021. "Optimal exit decision of venture capital under time-inconsistent preferences," Papers 2103.11557, arXiv.org.
    15. Gamba, Andrea & Tesser, Matteo, 2009. "Structural estimation of real options models," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 798-816, April.
    16. Graham, Jeffrey, 2011. "Strategic real options under asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 922-934, June.
    17. Paulo J. Pereira & Artur Rodrigues, 2015. "A theory on merger timing and announcement returns," NIPE Working Papers 13/2015, NIPE - Universidade do Minho.
    18. Pablo Moran, 2017. "Information Revelation in Merger Waves," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 6(2), pages 174-233.
    19. Pereira, Paulo J. & Rodrigues, Artur, 2019. "Bargaining merger terms and the effect on the announcement returns," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 510-521.
    20. Yanzhao Li & Ju-e Guo & Shaolong Sun & Yongwu Li, 2022. "How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-24, December.
    21. Miyata, Ryo & Suzuki, Teruyoshi & Yagi, Kyoko, 2022. "The Dynamics of Takeovers through Exchange Offers in the Presence of Competition," Discussion paper series. A 362, Graduate School of Economics and Business Administration, Hokkaido University.
    22. Mirosław Wasilewski & Serhiy Zabolotnyy & Dmytro Osiichuk, 2021. "Characteristics and Shareholder Wealth Effects of Mergers and Acquisitions Involving European Renewable Energy Companies," Energies, MDPI, vol. 14(21), pages 1-20, November.
    23. Lukas, Elmar & Pereira, Paulo J. & Rodrigues, Artur, 2019. "Designing optimal M&A strategies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 1-20.
    24. Dockner, Engelbert J. & Hartl, Richard F. & Kort, Peter M., 2019. "Dynamic capital structure choice and investment timing," Journal of Economic Dynamics and Control, Elsevier, vol. 102(C), pages 70-80.

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