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TitleDesigning optimal M&A strategies under uncertainty
Author(s)Lukas, Elmar
Pereira, Paulo J.
Rodrigues, Artur
Real options
Sequential investment
Cooperative and non-cooperative bargaining
Issue date1-Jul-2019
PublisherElsevier Science BV
JournalJournal of Economic Dynamics and Control
CitationLukas, E., Pereira, P. J., & Rodrigues, A. (2019). Designing optimal M&A strategies under uncertainty. Journal of Economic Dynamics and Control, 104, 1-20
Abstract(s)The recent surge in M&A activities highlights firms' motivation to gain or maintain market leadership. Along with the unparalleled volume of M&As, more and more firms favor establishing acquisition programs that lead to multiple subsequent M&As over time. In this paper, we study the entrance in a market by means of M&A when different strategies to acquire a prominent incumbent are available to the acquirer. In particular, the firm might opt for a big leap, where it acquires the prominent incumbent; the alternative is to design an acquisition program that allows moving in small steps by acquiring a minor company first and the larger prominent player later on. We employ a dynamic game-theoretic real options model to investigate the effect of uncertainty and synergies on the strategy choices and also consider alternative contract designs for the acquisition program, such as hostile, friendly or mixed. Our findings reveal that firms prefer acquisition programs to big leap strategies when the industry exhibits high levels of uncertainty and can occur even when the acquisition of the first target destroys value. Moreover, some acquisition programs profit from a first mover pass-through where the acquirer can jointly utilize his first-mover advantage when negotiating with multiple targets. Finally, novel testable hypotheses are derived from the model. (C) 2019 Elsevier B.V. All rights reserved.
Publisher version
AccessEmbargoed access (2 Years)
Appears in Collections:NIPE - Artigos em Revistas de Circulação Internacional com Arbitragem Científica

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