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Financial Strategies in Mergers and Acquisitions (M&A): The Case of Regulated Firms

  • Helder Valente

    ()

    (CETE, Faculdade de Economia, Universidade do Porto)

In this paper, a general model of strategic behaviour of (regulated and non-regulated) firms in M&A is presented. For non-regulated firms, the model indicates that targeted firms issue new debt strategically. In this case, the firm's capital structure is chosen so that it maximizes the (ex-ante) market value of the firm. However, the focus of the paper is on regulated firms (mostly monopolies). For these firms, the model shows that managers, acting on behalf of shareholders, make their strategic decisions on debt issuing and investment, in anticipation of both the decisions of the regulatory body and the responses of financial markets. These decisions are aimed at influencing the probability that an acquisition occurs as well as the price the potential bidder will have to pay. However, such decisions are also made with a view to influencing the regulatory policies (maximum price or rate of return permitted), thereby mitigating the probability that, in the regulatory game, the regulator adopts an opportunistic behaviour. Application of these results to some real-world situations (such as regulated public utilities┬┤companies) is straighforward.

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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 0307.

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Length: 20 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:por:cetedp:0307
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  1. Spiegel, Y. & Spulber, D.F., 1993. "Capital Structure with Countervailing Incentives," Papers 93, Bell Communications - Economic Research Group.
  2. Vogelsang, Ingo, 2002. "Incentive Regulation and Competition in Public Utility Markets: A 20-Year Perspective," Journal of Regulatory Economics, Springer, vol. 22(1), pages 5-27, July.
  3. Israel, Ronen, 1991. " Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing," Journal of Finance, American Finance Association, vol. 46(4), pages 1391-1409, September.
  4. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-53, June.
  5. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
  6. Sudipto Dasgupta & Sheridan Titman, 1996. "Pricing Strategy and Financial Policy," NBER Working Papers 5498, National Bureau of Economic Research, Inc.
  7. James A. Brander & Tracy R. Lewis, 1988. "Bankruptcy Costs and the Theory of Oligopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 21(2), pages 221-43, May.
  8. Taggart, Robert A, Jr, 1981. "Rate-of-Return Regulation and Utility Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 36(2), pages 383-93, May.
  9. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
  10. Binder, John J & Norton, Seth W, 1999. "Regulation, Profit Variability and Beta," Journal of Regulatory Economics, Springer, vol. 15(3), pages 249-66, May.
  11. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
  12. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, June.
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