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Risk, Strategy, and Optimal Timing of M&A Activity

Author

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  • J Thijssen

    (Department of Economics, Trinity College)

Abstract
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.

Suggested Citation

  • J Thijssen, 2005. "Risk, Strategy, and Optimal Timing of M&A Activity," Trinity Economics Papers tep7, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep7
    as

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    File URL: http://www.tcd.ie/Economics/TEP/2005_papers/TEP7.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    4. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    5. 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, President and Fellows of Harvard College, vol. 98(2), pages 185-199.
    6. repec:dau:papers:123456789/13604 is not listed on IDEAS
    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. Alexander Schrader & Stephen Martin, 1998. "Vertical Market Participation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(3), pages 321-331, June.
    9. Hans FÃllmer & Peter Leukert, 1999. "Quantile hedging," Finance and Stochastics, Springer, vol. 3(3), pages 251-273.
    10. 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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    Cited by:

    1. Toxvaerd, Flavio, 2008. "Strategic merger waves: A theory of musical chairs," Journal of Economic Theory, Elsevier, vol. 140(1), pages 1-26, May.
    2. Adesoji O. Adelaja & Ramyani Mukhopadhyay, 2022. "Time‐to‐completion for mergers and acquisitions in the food and agribusiness industry," Agribusiness, John Wiley & Sons, Ltd., vol. 38(3), pages 579-607, July.

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