Strategic Merger Waves: A Theory of Musical Chairs

29 Pages Posted: 11 Mar 2003

See all articles by Flavio Toxvaerd

Flavio Toxvaerd

University of Cambridge - Faculty of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2004

Abstract

This paper proposes an explanation of merger waves based on a dynamic preemption game. 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. I first consider a complete information model and show that the above tradeoff leads to a continuum of subgame perfect equilibria that are strictly Pareto ranked. All 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. The comparative dynamics predictions of the model are related to stylized facts.

Keywords: Merger waves, preemption, dynamic global games, real options games

Keywords: Merger waves, preemption, dynamic global games, real options games

JEL Classification: C73, D92, G34, L13

Suggested Citation

Toxvaerd, Flavio, Strategic Merger Waves: A Theory of Musical Chairs (May 2004). Available at SSRN: https://ssrn.com/abstract=374281 or http://dx.doi.org/10.2139/ssrn.374281

Flavio Toxvaerd (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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