Risk, Strategy, and Optimal Timing of M&A Activity
In this paper, the problem of mergers and acquisitions under pro¯t uncer- tainty is considered. A two ¯rm model is developed where M&A activity is modelled as an act of risk diversi¯cation. We study the case where only the larger ¯rm engages in M&A activity and the case where both ¯rms do. It is shown that takeovers can be optimal during both economic expansions and contractions. The option value of M&A activity is determined. We argue that there is a minimum level of positive synergies for M&A activity to be optimal, which is increasing in the level of diversi¯cation. Furthermore, it is shown that under M&A competition, this option value vanishes completely and that hostile takeovers are never optimal. An analysis of optimal portfolio selection by a risk averse investor shows ambiguous wealth results of M&A activity.
|Date of creation:||Aug 2005|
|Contact details of provider:|| Postal: Trinity College, Dublin 2|
Phone: (+ 353 1) 6081325
Web page: http://www.tcd.ie/Economics/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
- Morellec, Erwan & Zhdanov, Alexei, 2005. "The dynamics of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 77(3), pages 649-672, September.
- Farrell, J. & Shapiro, C., 1988.
"Horizontal Mergers: An Equilibrium Analysis,"
17, Princeton, Woodrow Wilson School - Discussion Paper.
- Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
- Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
- repec:dau:papers:123456789/13604 is not listed on IDEAS
- Alexander Schrader & Stephen Martin, 1998. "Vertical Market Participation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(3), pages 321-331, June.
- Hans FÃllmer & Peter Leukert, 1999. "Quantile hedging," Finance and Stochastics, Springer, vol. 3(3), pages 251-273.
When requesting a correction, please mention this item's handle: RePEc:tcd:tcduee:tep7. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Patricia Hughes)
If references are entirely missing, you can add them using this form.