The Timing and Terms of Takeovers Under Uncertainty: A Real Options Approach

JIMS Working Paper No. 3/2001

41 Pages Posted: 11 Dec 2001

See all articles by Bart M. Lambrecht

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Date Written: March 2001

Abstract

This paper presents a dynamic model for the timing and terms of mergers, stock offers and cash offers when the output price for firms is stochastic and when firms have complete information. We show that takeovers motivated by increased returns to scale or by decreased unit production costs are procyclical. Mergers are modelled as the outcome of a Nash equilibrium in which both companies simultaneously determine the timing and terms of the restructuring, whereas stock and cash offers are the outcome of a Stackelberg leader follower equilibrium in which the target first fixes its reservation bid premium and the acquirer subsequently decides on the timing of the takeover. For mergers, each firm's cumulative return consists of a synergy effect that rises with the increase in its production scale parameter. With tender offers, the target's synergy effect is augmented by a bid premium that is increasing in the output price volatility, the acquirer's return and the bidder to target size ratio. The timing of mergers is shown to be globally efficient. Separation of the timing decision and the terms decision causes stock offers and cash offers to happen inefficiently late. Pure cash offers happen even later than stock offers because the acquirer's payoff has optionlike features, whereas the target's has not. Delaying the restructuring therefore favors the acquirer at the expense of the target.

Keywords: takeover activity, timing, return, real option

JEL Classification: G34, C72, G13

Suggested Citation

Lambrecht, Bart, The Timing and Terms of Takeovers Under Uncertainty: A Real Options Approach (March 2001). JIMS Working Paper No. 3/2001. Available at SSRN: https://ssrn.com/abstract=292980 or http://dx.doi.org/10.2139/ssrn.292980

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
1,105
Abstract Views
4,593
rank
19,136
PlumX Metrics