Hostile Takeovers or Friendly Mergers?: A Real Options Analysis

29 Pages Posted: 14 Aug 2019 Last revised: 6 Dec 2019

See all articles by Takeshi Ebina

Takeshi Ebina

Meiji University - School of Commerce

Yuya Kumakura

Hamagin Research Institute, Ltd.

Katsumasa Nishide

Graduate School of Economics, Hitotsubashi University

Date Written: December 5, 2019

Abstract

This paper analyses a real options model of mergers and takeovers between two firms facing different but correlated uncertainty in profits. It is assumed that firms can choose two alternatives; hostile takeover or friendly merger. In a hostile takeover, a bidder firm takes all the extra value but should incur takeover costs, while in a friendly merger both firms do not bear takeover costs and share the extra value through Nash bargaining. We show how demand uncertainty and takeover costs influence which firm to be a bidder and which form of amalgamation to happen. We also find that a smaller firm can be a bidder to a larger firm in a hostile way, which is sometimes observed in actual markets.

Keywords: Merger and acquisition, Real option, Nash bargaining

JEL Classification: C61, G32, G34

Suggested Citation

Ebina, Takeshi and Kumakura, Yuya and Nishide, Katsumasa, Hostile Takeovers or Friendly Mergers?: A Real Options Analysis (December 5, 2019). Available at SSRN: https://ssrn.com/abstract=3435335 or http://dx.doi.org/10.2139/ssrn.3435335

Takeshi Ebina

Meiji University - School of Commerce ( email )

1-1 Kanda-Surugadai
Chiyoda-ku
Tokyo
Japan

Yuya Kumakura

Hamagin Research Institute, Ltd. ( email )

Katsumasa Nishide (Contact Author)

Graduate School of Economics, Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

HOME PAGE: http://www1.econ.hit-u.ac.jp/nishide/

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