Buyouts Under the Threat of Preemption

52 Pages Posted: 16 Feb 2018

See all articles by Monika Tarsalewska

Monika Tarsalewska

University of Exeter Business School

Date Written: February 6, 2018

Abstract

This paper analyses the effects of preemption fears on the buyout efficiency when firms combine non-synergistic operational activities and have asymmetric access to financing. Bidders with preemption fears are more likely to acquire target firms at an earlier development stage. However, if uncertainty is high, an acquirer may opt to wait and buy the target firm at a later stage as assets in place. The fear of preemption affects the efficient exercise of each offer differently. While the timing of a hostile takeover under threat of preemption converges to an efficient global optimiser threshold, negotiated mergers are exercised inefficiently too early. Premiums to the target firm are higher when the firm is acquired at an earlier stage, and when the bidder fears being preempted.

Keywords: Buyouts, Real Options, Fear of Preemption

JEL Classification: G34, G13, G32

Suggested Citation

Tarsalewska, Monika, Buyouts Under the Threat of Preemption (February 6, 2018). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3118830

Monika Tarsalewska (Contact Author)

University of Exeter Business School ( email )

XFI building, Streatham Campus
Rennes Drive
Exeter, Devon EX4 4ST
United Kingdom

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