Working Paper: CEPR ID: DP7678
Authors: Robin Mason; Helen Weeds
Abstract: Empirical studies have found that takeover activity is positively related to the absolute size of industry-level shocks. In this paper we develop a dynamic framework to analyze the timing of takeover which explains this pattern. Takeover may create value either by exploiting synergies or through fixed cost savings, the relative value of each approach being affected by shocks to an industry variable. With competing acquirers of different types, takeover occurs only when shocks are sufficiently large in either direction, with no activity taking place in between. We model both hostile takeover, for which the timing and terms are determined by competing bidders, and agreed takeover, where the target chooses when to open negotiations with one of the acquirers. We examine implications of our analysis for the efficiency of the market for corporate control, finding that the direction of inefficiency depends on the form of takeover. We also analyze the dependence of takeover activity on the degree of uncertainty about industry conditions.
Keywords: acquisitions; mergers; real options; takeovers; timing games
JEL Codes: D44; D81; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absolute size of industry-level shocks (L16) | takeover activity (G34) |
| moderate shocks (E65) | no takeovers (G34) |
| high industry state (L69) | delay in takeover activity by growth-acquirers (G34) |
| low industry state (L59) | delay in takeover activity by decline-acquirers (G34) |
| competition among bidders (D44) | delay in takeover activity (G34) |
| market for corporate control inefficiency (G34) | excessive delays in competitive bidding scenarios (D44) |
| market for corporate control inefficiency (G34) | insufficient delays in agreed takeovers (G34) |
| competitive bidding (D44) | more delay in takeovers (G34) |
| agreed takeovers (G34) | too quickly (Y60) |