Strategic Merger Waves: A Theory of Musical Chairs

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: This paper proposes an explanation of merger waves based on the interaction between competitive pressure and irreversibility of mergers in an uncertain environment. A set of acquirers compete over time for scarce targets. At each point in time, an acquirer can either postpone a takeover attempt, or raid immediately. By postponing the takeover attempt, an acquirer may gain from more favorable future market conditions, but runs the risk of being preempted by rivals. First, a complete information model is considered, and it is shown that the above tradeoff leads to a continuum of subgame perfect equilibria in monotone strategies that are strictly Pareto ranked. All these equilibria share the feature that all acquirers rush simultaneously in merger waves. The model is then extended to a dynamic global game by introducing slightly noisy private information about merger profitability. This game is shown to have a unique Markov perfect Bayesian equilibrium in monotone strategies, and the timing of the merger wave can thus be predicted. Last, the comparative dynamics predictions of the model are related to stylized facts.

Keywords: merger waves; preemption; dynamic global games; real options games (search for similar items in EconPapers)
JEL-codes: C73 D92 G34 L13 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-05
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Strategic merger waves: A theory of musical chairs (2008)
Working Paper: Strategic Merger Waves: A Theory of Musical Chairs (2007)
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