Means of Payment and Timing of Mergers and Acquisitions in a Dynamic Economy

Abstract:     
We develop a theory of acquisition timing and means of payment for financially constrained firms. Bidders with private valuations choose when to approach the target and whether to bid in cash or stock. By linkage principle, bidders prefer to bid in cash, but are limited by cash constraints. The model delivers many implications, both novel and consistent with existing evidence. First, high-synergy targets are approached when they are young and small, and are acquired for cash. Low-synergy targets are acquired after they have grown, and for stock. This selection is consistent with higher takeover premiums observed in cash versus stock deals. Second, cash constraints need not have a monotonic effect on acquisition timing. Third, acquisitions can be caused by shocks not only to fundamentals but also to financial constraints. Finally, some targets are never acquired despite positive synergies.

Number of Pages in PDF File: 58

Keywords: auctions, financial constraints, cash constraints, mergers and acquisitions, real options, security design

JEL Classification: D44, G32, G34

working papers series