A pre-emption model of mergers

A pre-emption model of mergers This paper studies the paradox of the value destroying mergers in a sequential negotiation model in which the synergy accrued from the mergers is private information. This study shows that in a simultaneous competitive bidding process, the winner’s curse of overpaying rarely occurs but may arise in the target firm initiated sequential negotiations; and if the merger is successful then the outcome is never value destroying for the combined firm. Thus the acquirer’s overpayment cannot be considered as the ‘winner’s curse’ that results from the post-announcement competitive bidding but rather than the result of the target’s strengthened bargaining power in the sequential negotiations. The implications and intuition of such value-destroying mergers thus differ substantially from that of existing pre-emptive mergers and acquisitions models that use a simultaneous bidding mechanism. The results also imply that the ‘acquisition premium’ accrues to the target firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics Springer Journals

A pre-emption model of mergers

Dong, Baomin; Wang, Frank
Journal of Economics, Volume 113 (2) – Nov 9, 2013
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Publisher
Springer Journals
Copyright
Copyright © 2013 by Springer-Verlag Wien
Subject
Economics / Management Science; Economics general; Economic Theory; International Economics; Microeconomics; R & D/Technology Policy
ISSN
0931-8658
eISSN
1617-7134
DOI
10.1007/s00712-013-0379-8
Publisher site
See Article on Publisher Site

Abstract

This paper studies the paradox of the value destroying mergers in a sequential negotiation model in which the synergy accrued from the mergers is private information. This study shows that in a simultaneous competitive bidding process, the winner’s curse of overpaying rarely occurs but may arise in the target firm initiated sequential negotiations; and if the merger is successful then the outcome is never value destroying for the combined firm. Thus the acquirer’s overpayment cannot be considered as the ‘winner’s curse’ that results from the post-announcement competitive bidding but rather than the result of the target’s strengthened bargaining power in the sequential negotiations. The implications and intuition of such value-destroying mergers thus differ substantially from that of existing pre-emptive mergers and acquisitions models that use a simultaneous bidding mechanism. The results also imply that the ‘acquisition premium’ accrues to the target firms.

Journal

Journal of Economics – Springer Journals

Published: Nov 9, 2013

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