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The Dynamics of Mergers and Acquisitions

Author

Listed:
  • Erwan Morellec

    () (HEC, University of Lausanne and FAME)

  • Alexei Zdhanov

    () (University of Rochester)

Abstract

This paper presents a dynamic model of takeovers based on the stock market valuations of merging firms. The model incorporates competition and imperfect information and determines the terms and timing of takeovers by solving option exercise games between bidding and target shareholders. The implications of the model for returns to stockholders are consistent with the available evidence. Notably, the model predicts that (1) returns to target shareholders should be larger than returns to bidding shareholders, and (2) returns to bidding share-holders can be negative if there is competition for the acquisition of the target. In addition, the model generates new predictions relating these returns to the drift, volatility and correlation coefficient of the bidder and the target stock returns and to the dispersion of beliefs regarding the benefits of the takeover.

Suggested Citation

  • Erwan Morellec & Alexei Zdhanov, 2004. "The Dynamics of Mergers and Acquisitions," FAME Research Paper Series rp126, International Center for Financial Asset Management and Engineering.
  • Handle: RePEc:fam:rpseri:rp126
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    File URL: http://www.swissfinanceinstitute.ch/rp126.pdf
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    References listed on IDEAS

    as
    1. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    2. Grenadier, Steven R, 1999. "Information Revelation through Option Exercise," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 95-129.
    3. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
    4. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    5. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    6. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
    7. 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.
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    Citations

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    Cited by:

    1. Gary Gorton & Matthias Kahl & Richard Rosen, 2005. "Eat or Be Eaten: A Theory of Mergers and Merger Waves," NBER Working Papers 11364, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    takeovers; real options; competition; learning.;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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