Merger Negotiations and Ex-Post Regret

32 Pages Posted: 29 Dec 2006

See all articles by Dennis L. Gärtner

Dennis L. Gärtner

University of St. Gallen

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

Abstract

We consider a setting in which two potential merger partners each possess private information pertaining both to the profitability of the merged entity and to stand-alone profits, and investigate the extent to which this private information makes ex-post regret an unavoidable phenomenon in merger negotiations. To this end, we consider ex-post mechanisms, which use both players' reports to determine whether or not a merger will take place and what each player will earn in each case. When the outside option of at least one player is known, the efficient merger decision can be implemented by such a mechanism under plausible budget-balance requirements. When neither outside option is known, we show that the potential for regret-free implementation is much more limited, unless the budget balance condition is relaxed to permit money-burning in the case of false reports.

Keywords: Mergers, mechanism design, asymmetric information, interdependent valuations, efficient mechanisms

JEL Classification: D82, G34, L10

Suggested Citation

Gärtner, Dennis L. and Schmutzler, Armin, Merger Negotiations and Ex-Post Regret (November 2006). CEPR Discussion Paper No. 5911, Available at SSRN: https://ssrn.com/abstract=954137

Dennis L. Gärtner

University of St. Gallen ( email )

Bodanstrasse 6
St Gallen, 9000
Switzerland

Armin Schmutzler (Contact Author)

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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