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The Dynamics of Mergers and Acquisitions

29 Pages Posted: 30 Aug 2001  

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Alexei Zhdanov

Pennsylvania State University

Date Written: May 2004

Abstract

This paper presents a dynamic model of takeovers based on the stock market valuations of merging firms. The model incorporates competition and imperfect information and determines the terms and timing of takeovers by solving option exercise games between bidding and target shareholders. The implications of the model for returns to stockholders are consistent with the available evidence. Notably, the model predicts that (1) returns to target shareholders should be larger than returns to bidding shareholders, and (2) returns to bidding shareholders can be negative if there is competition for the acquisition of the target. In addition, the model generates new predictions relating these returns to the drift, volatility and correlation coefficient of the bidder and the target stock returns and to the dispersion of beliefs regarding the benefits of the takeover.

Keywords: Takeovers, Option Games, Real Options, Learning

JEL Classification: G13, G34

Suggested Citation

Morellec, Erwan and Zhdanov, Alexei, The Dynamics of Mergers and Acquisitions (May 2004). Simon School of Business Working Paper No. FR 01-11. Available at SSRN: https://ssrn.com/abstract=281534 or http://dx.doi.org/10.2139/ssrn.281534

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Alexei Zhdanov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

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