Strategic Merger Waves: A Theory of Musical Chairs

30 Pages Posted: 19 May 2008

See all articles by Flavio Toxvaerd

Flavio Toxvaerd

University of Cambridge - Faculty of Economics

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Date Written: March 2007

Abstract

This paper proposes an explanation of merger waves based on the interaction between competitive pressure and irreversibility of mergers in an uncertain environment. A set of acquirers compete over time for scarce targets. At each point in time, an acquirer can either postpone a takeover attempt, or raid immediately. By postponing the takeover attempt, an acquirer may gain from more favourable future market conditions, but runs the risk of being preempted by rivals. First, a complete information model is considered, and it is shown that the above tradeoff leads to a continuum of subgame perfect equilibria in monotone strategies that are strictly Pareto ranked. All these equilibria share the feature that all acquirers rush simultaneously in merger waves. The model is then extended to a dynamic global game by introducing slightly noisy private information about merger profitability. This game is shown to have a unique Markov perfect Bayesian equilibrium in monotone strategies, and the timing of the merger wave can thus be predicted. Last, the comparative dynamics predictions of the model are related to stylized facts.

Keywords: Dynamic global games, merger waves, preemption, real options games

JEL Classification: C73, D92, G34, L13

Suggested Citation

Toxvaerd, Flavio, Strategic Merger Waves: A Theory of Musical Chairs (March 2007). CEPR Discussion Paper No. DP6159, Available at SSRN: https://ssrn.com/abstract=1133803

Flavio Toxvaerd (Contact Author)

University of Cambridge - Faculty of Economics ( email )

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