Merger Mechanisms

38 Pages Posted: 19 Feb 2004

See all articles by Sandro Brusco

Sandro Brusco

SUNY at Stony Brook University, College of Arts and Science, Department of Economics

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Giuseppe Lopomo

Fuqua School - Duke University; Duke University - Department of Economics

Date Written: January 2004

Abstract

A firm can merge with one of n potential partners. The owner of each firm has private information about both his firm's stand-alone value and a component of the synergies that would be realized by the merger involving his firm. We characterize incentive-efficient mechanisms in two cases. First, we assume that the value of any newly formed partnership is verifiable, hence transfers can be made contingent on the new information accruing after the merger. Second, we study the case of uncontingent rules. In the first case, we show that it is not optimal, in general, to redistribute shares of non-merging firms, and identify necessary and sufficient conditions for the implementability of efficient merger rules. In the second case, we show that the first-best can be obtained i) always, if the synergy values are privately known but the firms' stand-alone values are observable; ii) only with sufficiently large synergies, if the firms' stand-alone are privately known; and iii) never, if the set of feasible mechanisms is restricted to auctions in shares.

Keywords: Mechanism design, Merger

JEL Classification: C72, D44, G34

Suggested Citation

Brusco, Sandro and Viswanathan, S. and Lopomo, Giuseppe, Merger Mechanisms (January 2004). FEEM Working Paper No. 07.2004. Available at SSRN: https://ssrn.com/abstract=500914 or http://dx.doi.org/10.2139/ssrn.500914

Sandro Brusco (Contact Author)

SUNY at Stony Brook University, College of Arts and Science, Department of Economics ( email )

Stony Brook, NY 11794
United States

S. Viswanathan

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Giuseppe Lopomo

Fuqua School - Duke University ( email )

Box 90097
Durham, NC 27708-0097
United States
(919) 660-7820 (Phone)
(919) 660-7971 (Fax)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

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