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

  • Thijssen, Jacco J.J.

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.

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File URL: http://www.sciencedirect.com/science/article/B6V85-4PFW65K-1/1/6e7c735a6c233900c096749670b3a262
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 5 (May)
Pages: 1701-1720

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:5:p:1701-1720
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Luis Alvarez & Rune Stenbacka, 2006. "Takeover Timing, Implementation Uncertainty, and Embedded Divestment Options," Review of Finance, European Finance Association, vol. 10(3), pages 417-441, September.
  2. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  3. Bart M. Lambrecht & Stewart C. Myers, 2007. "A Theory of Takeovers and Disinvestment," Journal of Finance, American Finance Association, vol. 62(2), pages 809-845, 04.
  4. Luis Alvarez & Rune Stenbacka, 2003. "Optimal risk adoption: a real options approach," Economic Theory, Springer, vol. 23(1), pages 123-147, December.
  5. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
  6. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  7. Morellec, Erwan & Zhdanov, Alexei, 2005. "The dynamics of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 77(3), pages 649-672, September.
  8. Yaozhong Hu & Bernt ├śksendal, 1998. "Optimal time to invest when the price processes are geometric Brownian motions," Finance and Stochastics, Springer, vol. 2(3), pages 295-310.
  9. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1988. "Characteristics of Targets of Hostile and Friendly Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 101-136 National Bureau of Economic Research, Inc.
  10. Dirk Hackbarth & Erwan Morellec, 2008. "Stock Returns in Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 63(3), pages 1213-1252, 06.
  11. Pauli Murto, 2004. "Exit in Duopoly Under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 111-127, Spring.
  12. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
  13. Lambrecht, Bart M., 2004. "The timing and terms of mergers motivated by economies of scale," Journal of Financial Economics, Elsevier, vol. 72(1), pages 41-62, April.
  14. Jacco Thijssen, 2007. "Ramsey Waits: A Theory of Non-Exclusive Real Options with First-Mover Advantages," Discussion Papers 07/17, Department of Economics, University of York.
  15. Olsen, Trond E. & Stensland, Gunnar, 1992. "On optimal timing of investment when cost components are additive and follow geometric diffusions," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 39-51, January.
  16. Alvarez, Luis H. R. & Keppo, Jussi, 2002. "The impact of delivery lags on irreversible investment under uncertainty," European Journal of Operational Research, Elsevier, vol. 136(1), pages 173-180, January.
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